Most analysts felt that eBay (Nasdaq: EBAY ) was overpaying when it shelled out billions for Skype. The auctioneer finally agreed, when it took a whopping $1.4 billion charge to write down its investment in Skype four years ago.
If agreeing to pay as much as $4.2 billion -- before ultimately forking over closer to $3.1 billion -- seemed ludicrous in 2005, how does $8.5 billion sound now?
Microsoft (Nasdaq: MSFT ) will be shelling out more than twice as much as eBay did for Skype several years ago, giving it a giant Web-based chat platform to dissolve into its system.
Mr. Softy already has plans for Skype. It will support Xbox gaming, allowing Xbox LIVE gamers to chat more effectively along with Kinect motion-based controls. Much to the dismay of wireless carriers, it will inevitably work its way into Windows Phone handsets. Skype will also dovetail nicely with Lync, Outlook, Messenger, Hotmail, and any other communications-based initiative at Microsoft.
Microsoft claims that it will continue to support Skype on non-Microsoft platforms, and that's a good thing. You don't fork over $8.5 billion for software that reached 170 million users and delivered 207 billion minutes of voice and video chats last year only to implode it by making it Microsoft-centric.
It makes sense on paper, but didn't it also make sense when eBay made Skype the third verb in its portfolio six years ago? Skype was supposed to bring a voice to auction transactions. It was supposed to humanize PayPal transactions. The synergies never materialized.
Seller's remorse, revisited
eBay also looks pretty dumb for selling nearly two-thirds of Skype for $1.9 billion less than two years ago. Sure, the stock popped 3% higher this morning on the news because it still owns 35% of Skype. The payday could've been so much sweeter if it had held on.
It will be hard for Microsoft to justify this kind of capital outlay for a platform that has had its monetization challenges. The stock opened lower this morning, so Wall Street isn't impressed. The software behemoth had to do something, though.
Microsoft's flagship operating system franchise suffered a 4% dip in revenue in its latest quarter, and that's never coming back. Yes, I said never.
Consumers are spending less time on Windows-fueled PC and laptop experiences, settling for "good enough" computing on more portable smartphone and tablet gadgetry running Apple (Nasdaq: AAPL ) iOS and Google (Nasdaq: GOOG ) Android.
Microsoft is holding up better on the business and server software fronts, but it clearly has to do something to shake things up. It's overpaying for Skype, because nothing that it can underpay for would be worth buying.
Shopping with Mr. Softy
Let's hope that Microsoft doesn't stop here. While it can always go for cheaper chat plays such as Vonage (NYSE: VG ) for telephony and LivePerson (Nasdaq: LPSN ) for consumer-facing support to beef up its new Skype division, the real opportunity here is to keep the buying spree going to build up its other divisions.
Microsoft continues to lose money in its online division. Now would be a good time to crack open the vault a little wider to make some needle-moving buys to take the red out of Redmond. The gaming division is rocking these days -- and an embarrassingly hacked rival network will keep the good times rolling -- but now would be a good time to make a bigger splash in social gaming so it can actually cash in on the Android and iOS revolutions.
There's also a chance to breathe new life into mobile. Paying billions to a fading handset maker for support may pay off, but there hasn't been a better time to take advantage of a desperate Research in Motion (Nasdaq: RIMM ) during BlackBerry-picking season.
I applaud Microsoft for doing something this morning, but I reserve a standing ovation for the other deals that make even more sense.
Do you like the Skype acquisition? What should Microsoft buy next? Share your thoughts in the comment box below.