On 5/10, Microsoft (NASDAQ: MSFT) announced it had reached an agreement to buy Skype from its current owners, including eBay (NASDAQ: EBAY), for $8.5 billion. According to The New York Times, the deal helps MSFT expand its role in telecom, which has declined in recent years but is experiencing a resurgence with Windows Phone 7:
In agreeing Tuesday to pay $8.5 billion to buy Skype, the pioneer in Internet phone calls, Microsoft is embracing a technology that is transforming the way people communicate at home and at work. And by stitching Skype technology into Microsoft products, used by hundreds of millions of people, the software giant could hasten the mainstream adoption of video communications, especially in businesses.
Microsoft, although rich and powerful, lags in new fields like smartphone software. Skype could help it better compete with the new giants of technology, like Google and Apple.
“Skype has been a forerunner, and this deal is Microsoft trying to become relevant in this new age of Internet communications,” said Berge Ayvazian, a telecommunications consultant. “It could really change things for Microsoft and accelerate the spread of this new technology.”
MarketWatch noted that an easily overlooked aspect of the deal is that Microsoft is able to purchase Skype on tax advantageous terms:
Since Skype is based in Luxembourg, Microsoft’s MSFT +0.20% $8.5 billion that it has agreed to pay effectively stretches further. The U.S. corporate tax rate is 35%, but Luxembourg’s is roughly 22%.
That 13 percentage point gap is something Microsoft wouldn’t get if they acquired a U.S.-based company. And Microsoft has a big incentive to make foreign deals — according to an analysis from the brokerage firm Collins Stewart, 80% of Microsoft’s cash balance last quarter was overseas.
Om Malik of GigaOM highlighted the strategic rationale for the transaction:
- Skype gives Microsoft a boost in the enterprise collaboration market, thanks to Skype’s voice, video and sharing capabilities, especially when competing with Cisco and Google.
- It gives Microsoft a working relationship with carriers, many of them looking to partner with Skype as they start to transition to LTE-based networks.
- It would give them a must-have application/service that can help with the adoption of the future versions of Windows Mobile operating system.
- However, the biggest reason for Microsoft to buy Skype is Windows Phone 7 (Mobile OS) and Nokia. The software giant needs a competitive offering to Google Voice and Apple’s emerging communication platform, Facetime.
Covestor models that held MSFT as of 5/10 include:
- Fortune 100 by Philip Dhingra
- Dividend Growth by James Hofmann
- Domestic Dividend by Harvest Financial Partners
- Hedged Equity by Swan Asset Management
- Suncoast Equity by Suncoast Equity Management
- S&P 500 Best of Breed by Conrad Leifur
- Large Cap Core Equity by ASB Capital
- Relative Value by Quantemonics
- Net Payout Yields by Stone Fox Capital
- Core Holding by Vista Investment Management
Sources:
“For Microsoft, Skype Opens Vast New Market in Telecom” Steve Lohr. The New York Times, 5/10. https://www.nytimes.com/2011/05/11/technology/11skype.html?_r=1
“Microsoft-Skype deal shows need for tax reform” MarketWatch, 5/10. https://www.marketwatch.com/story/microsoft-skype-deal-shows-need-for-tax-reform-2011-05-10
“Why Microsoft Is Buying Skype for $8.5 Billion” Om Malik. GigaOM, 5/9. http://gigaom.com/2011/05/09/why-microsoft-is-buying-skype-for-8-billion/
