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Microsoft May Return to Glory Days with Purchase of Skype

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Microsoft (Nasdaq: MSFT  ) is widely reported to be close to buying the online telephone service Skype for more than $8 billion.

Skype was purchased by eBay (Nasdaq: EBAY  ) for $2.6 billion in 2005, but the hoped-for benefits of the deal never materialized, and eBay sold a 70% stake in the company to an investor group for $2 billion a year and a half ago.

The biggest acquisition that Microsoft made previously was the purchase of online advertising company aQuantive in 2007 for $6 billion, and if Microsoft completes the deal, it would be the software giant's biggest acquisition ever.

Microsoft also made a relatively small but important investment of $240 million for a 1.6% stake in social networking site Facebook in 2007.

Microsoft has been playing catch-up for years with Google (Nasdaq: GOOG  ) in the lucrative Internet search business but Microsoft's Bing search engine is still far behind Google in terms of revenue and searches completed.

More recently, Microsoft has set its sights on the mobile phone market and is taking on both Google and Apple (Nasdaq: AAPL  ) with its Windows Phone operating system.

Just last month, Microsoft and Nokia (NYSE: NOK  ) signed a deal that called for Nokia phones to move from their Symbian smartphone platform to Microsoft's Windows Phone platform.

Microsoft said at the time that, "Nokia will receive payments measured in the billions of dollars."

Although most of Skype's nearly 700 million users enjoy the service's free Internet phone calls, the company does have millions of customers who are willing to pay for enhanced services.

However, despite its popularity, the company has struggled to make a profit, reporting a loss of $7 million on revenue of $860 million last year.

Although Microsoft is still a very profitable company and has billions of dollars in cash holdings, most of those profits come from its Microsoft Windows and Microsoft Office businesses, and the company has struggled to find profitable growth in its other businesses.

Between its deal with Nokia and the possible addition of Skype and its nearly 700 million users, Microsoft would be positioning itself as a major force within the smartphone and Internet telephone markets.

If Microsoft is able to make these deals work, the company may take some of the wind out of the sails of competitors like Google and Apple and once again become a growth stock that has people talking.

Google and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers recommendation. Apple and eBay are Motley Fool Stock Advisor choices. Motley Fool Options has recommended a bull call spread position on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. Alpha Newsletter Account, LLC owns shares of Microsoft. 

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Read/Post Comments (6) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 10, 2011, at 11:27 AM, jimmy4040 wrote:

    With Ballmer still in charge, we've seen this movie before.

  • Report this Comment On May 10, 2011, at 12:12 PM, jargonsays wrote:

    I can't wait to see what kind of "Zune" they will come up with this time. No doubt Ballmer will be throwing billions around in a last ditch effort to compete in the mobile arena.

  • Report this Comment On May 10, 2011, at 12:45 PM, techy46 wrote:

    Ballmer invested $240 in Facebook for 1.6% interest. Facebook and Google both wanted Skype. Microsoft, Nokia and Skype plus Facebook equals lots of opportunities. What's Apple doing with their $60b? Maybe they'll try to buy ARMH?

  • Report this Comment On May 10, 2011, at 1:25 PM, techlvr11 wrote:

    Those who Gods want to destroy, first they make mad.

    Details and logic for acquisition are sketchy at best. We have to wait for Ballmer to come up with a better explanation than "Together we will create the future of real-time communications".

    Most importantly - how will MSFT generate about $10B within 2 years of Skype acquisition (assuming a modest 10% yoy return on investment)?

    How does this give them advantage in reviving PC/Windows sales which show sign of weakness?

    How will this help them in tablet market?

    How will this help them with MNO's like ATT/Vz who hate data hogs and have alternatives anyway.

    At best this seems to be MSFT's (expensive) response to Facetime. At worst, it looks like a desperate move by a spent force.

  • Report this Comment On May 10, 2011, at 2:22 PM, baldheadeddork wrote:

    @techlvr11 - Good questions.

    I think the strongest points of this acquisition are with Office. I can see a lot of potential for integrating Skype into Outlook as a text/voice/video chat feature. If the implementation is done right it could be the first killer app for Office in a long time.

    Skype could also be key if Microsoft wants to make a serious run at cloud-based CRM solutions. At the very least, offering Skype as a tool for Azure developers can make Azure more competitive. And on a related note, if it scales well it would be very attractive to incorporate VoIP management into Windows Server.

    In X-Box I don't think Skype offers a lot of functionality beyond the existing chat feature. I like it better as an integrated feature for Windows 8. It's not a killer app for the next desktop OS, but a well-integrated text/voice/video chat couldn't hurt.

    I think the upside on wifi tablets is pretty obvious. If it's an integral part of the ARM version of the next Windows it could give Microsoft a leg up over add-on Skype for iOS and Android, but the real upside for Microsoft on mobile devices and non-Office uses for Skype should be in ad revenue. They have a pretty good search engine for targeted placements and they have the infrastructure in place to sell the ads.

    I don't see Skype doing anything for MSFT on devices that depend on a telco wireless network, not at least as long as the big telcos want to price talk by the minute. If Verizon and AT&T become ISP's who also have a few legacy talk plans, then it might change but that day isn't close.

    What about other markets? I know the prevailing wisdom is that home phone service is dead, but 75% of US homes still have landline or VoIP service. Microsoft has a pretty good record with consumer hardware, and Skype already has a high user recognition. It won't be as sexy as the next iWhatever, and it will give MSFT critics that they're fighting to become the best buggy makers ever, but I think there's going to be a lot of money in home phone service for a long time.

    Last, I think the $10b in two years number is a bit on the steep side for a large acquisition. That would be a sixth of Google's annual revenues.

  • Report this Comment On May 10, 2011, at 2:40 PM, jimmy4040 wrote:


    When they give YOU Ballmer's job, I'll buy the calls!

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