A Happy Day for Facebook and Google

You really can’t tell, and they won’t admit, but I imagine that this morning there is a small celebration or two going on behind closed doors at Facebook and Google. As most of us have heard, Microsoft bought Skype. But why are the competitors and rumored rival bidders happy? Easy, the staggering price that Microsoft paid for a company it really doesn’t really need – most of what Skype can do is already baked into a MS product somewhere. So where did this valuation coming from?

First a little financial history – Skype was founded in 2003 and then sold in 2005 to eBay for $2.6 billion. Then in October 2007 eBay wrote down the value of Skype by $1.39 billion. When eBay finally sold off 70% in November 2009, Skype was valued at $2.75 billion.

Today, for some reason, Microsoft has paid $8.5 billion – roughly 1.5 years later.  What’s curious is this is on revenue of 860 million, roughly 10x multiple. (I won’t mention the fact that the net was a loss of 7 million for 2010)

Wow! – for technology they mostly had.

I really don’t get it, unless

  • is MS struggling to execute?
  • has their management lost internal faith?
  • there was no better alternatives to using their overseas cash?

I’m really curious to see how this purchase will be viewed in 2-3 years.

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