Strategic Implications of the Microsoft/Skype Deal

1Executive Summary

By now, Microsoft’s $8.5 billion deal with Skype, announced last week, is well documented. The acquisition is the largest that Microsoft has ever made, and it has raised a lot of questions, mainly because Skype generates so little revenue and actually posted a $6.9 million loss in 2010. Furthermore, many people were reasonably caught off guard by the deal: While Skype has been for sale before, Microsoft has never been speculated as a potential buyer.

Skype was primarily owned by four groups: eBay, Silver Lake Partnership, Andreessen Horowitz and Skype’s original co-founders, Niklas Zennström and Janus Friis. The company was ripe for acquisition, as it was in preparations for an IPO in 2010. As a precursor to that, Skype filed an S1 providing detailed information about its performance and plans. By some accounts, the sales price in the Microsoft deal represents a more than threefold increase in Skype’s value within two years.

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