The Smartest Move Microsoft Has Made in Years

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Hindsight is 20/20, or even better if you decided to get Lasik. But making the right decision at the right time is a whole lot harder, especially when you are one of the most scrutinized companies on the planet. Microsoft, for all of its former glory, has gotten a lot of flak from analysts, pundits, and investors. CEO Steve Ballmer probably has a tomato shield when he walks down the sidewalk. But looking back at one of the software company’s biggest decisions in recent years has me thinking that the software company has made the best progress since Windows 98.  

Smooth move, Ballmer
Though lambasted at the time for being a "quick, buy something!" purchase, Microsoft's (Nasdaq: MSFT  ) 2011 acquisition of Skype was a moment of true vision and boldness. The company paid a staggering $8.5 billion for the VoIP kingpin, and a lot of bald men in suits were very unhappy. But when you think about what Skype was able to accomplish in the nine years it has been in existence, it makes the $8.5 billion seem like a worthy investment. In those nine years, the company has come to facilitate one-third of all long distance calls placed on earth. Though no longer considered a fast-growing start up, Skype still grows its membership at a 40% clip year over year, according to CEO Tony Bates.

Now, I have a theory that Steve Ballmer was on a team from the Alien movies, and had one of those little creatures latch on to his face. How else could he have missed the idea of search technology being the next evolution of the Internet? The company has chased rival Google (Nasdaq: GOOG  ) for years with its Bing service, but I certainly don’t hear anyone ever say, "Let’s Bing it."

We can, however, give Ballmer credit for at least two things: 1) The Skype acquisition, as mentioned, and 2) Facebook (Nasdaq: FB  ) . I’m not about to suggest that Facebook is a wise investment for investors. Please, please do not think that is the takeaway of this article. But Microsoft’s decision to buy a small stake in the social network was smart, in that it set up Microsoft to accomplish some good old-fashioned horizontal integration. Microsoft’s Skype is embedded within Facebook or video chats. And the one thing Bing has over Google is that Facebook’s 900 million users can subconsciously interact with Bing's search results -- helping us find what we want based on things our friends have found and liked. Enough about Facebook, though, let’s get back to Skype.

Skype me to the moon
Microsoft may no longer be the sexy face of the software world, but Skype will keep this company relevant throughout the many versions of Windows and Internet Explorer upgrades. Skype is the biggest threat to Apple’s Facetime. If video-chatting begins to trend for mobile-users, Windows phones, with a built in Skype, may help the phone be more competitive with the iPhone and Android.

It’s when you zoom out, though, that you see the true value of Skype, and why Microsoft was so spot-on with its purchase. The introduction of Skype was the most influential paradigm shift in the telecom industry since the arrival of cell phones. When it came out, it blew our minds that there existed a way to call someone without any contract, or any telecom company to nag us and bill us to death. Skype forced the archaic telecom industry to enter the 21st century.

Skype can complement the array of Microsoft’s businesses, from its partnership with Facebook, to its Xbox live experience. Regardless of the upfront premium Microsoft had to pay for the company, I believe it will be Ballmer’s legacy move (if people choose not to focus on the list of less favorable decisions, like going to that spaceship full of aliens).

The future!
Since the Skype purchase, Microsoft has since bought Yammer, the Facebook of workplace social networking, for $1.2 billion. Yammer isn’t a bad idea, but its nothing as disruptive and as influential as Skype. As the giant continues to be eclipsed by smaller upstarts with sharper engineers and big ideas, look to this one-time startup as a value driver for years to come. However this is just the tip of the Microsoft iceberg.  Investors interested in the stock need to understand the many drivers moving Mr. Softy’s massive business.  For a more in depth, technical look at Microsoft, check out this premium report. It discusses not only Skype, but the rest of the $250 billion company, as well.

Fool Contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter @MikeyLewy. The Motley Fool owns shares of Facebook and Microsoft. Motley Fool newsletter serviceshave recommended buying shares of Facebook, Google, and Microsoft. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (4)

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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 September 07, 2012, at 3:00 AM, SisyphusRocks wrote:

    The other good thing about Skype, which semi-justified the outrageous price Microsoft paid for it, is that Skype was outside the U.S. Like all the other tech majors, the majority of Microsoft's cash is outside the U.S. and can't be repatriated to pay dividends or fund stock buybacks or create jobs here unless Microsoft pays a 35% tax on it. But it can be used to buy foreign headquartered companies, like Skype.

    When you understand that Skype's price was effectively 35% less in after tax U.S. dollars, the deal starts to seem a lot less outrageous. The same is true to a lesser extent for HP's purchase of Autonomy.

    It's unfortunate that some of our most successful companies are nearly forced by tax laws to invest outside the U.S., but until we get real tax reform that will probably continue to be the case. Expect more deals from Apple, Microsoft, Google, and Oracle for non-U.S. firms.

  • Report this Comment On September 07, 2012, at 10:06 AM, XMFMadMardigan wrote:

    That's a great point, thanks so much for commenting, Sisyphus!

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