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Analysts Agree: Microsoft's Skype Acquisition Might Work, Might Not

Published on May 10, 2011
by John Paczkowski

To hear tell from Microsoft CEO Steve Ballmer, there’s a lot to be happy about in its $8.5 billion acquisition of Skype, despite that heady price tag. Wall Street isn’t so sure. A first barrage of reactions from analysts this morning reveals mixed sentiments on the audacious deal. Below, a quick roundup of commentary on Microsoft’s biggest acquisition in more than three decades.

Kirk Materne, Evercore Partners
“The valuation is expensive, but it’s a strategic deal that could help bolster Microsoft’s overall communications strategy. [It provides Microsoft] with a key Internet communications business that can be used to help enhance the real-time communications capabilities of other Microsoft properties such as Outlook, Hotmail and XBox Live.”

Jim Yin, Standard & Poors
“We believe MSFT will leverage Skype technologies to multiple platforms, including Xbox and Kinect, Windows Phone, and other mobile devices running Windows operating systems. We also think the proposed acquisition will generate additional online advertising revenues. Still, we view the deal as an overall negative, given its size and the potential risks of integration.”

Al Hilwa, IDC
“Given eBay’s experience with Skype and the high price, it is fair to be critical of this acquisition, but I would say that Microsoft has considerably more assets to create synergies with Skype than eBay ever did. The success of the acquisition will likely pivot on whether Microsoft is able to exploit synergies such as adding consumer telephony to its Xbox/Kinect platform, integrating Skype with the new version of Windows in tablets or on the desktop, or using it to add stronger telephony features to its successful Lync portfolio for businesses. The paying customers are attractive and something that Windows Live Messenger does not have today, also creating another possible integration point.”

Sandeep Aggarwal, Caris & Co
”First, Microsoft can enhance its Communications/Lync Server 2010 for its enterprise-class customers. Second, Microsoft can also beef up its offerings for Live Meeting with Skype and further integrate Skype into Office. Third, as far as consumers are concerned, Microsoft can bring product integration and create lots of cross-selling and up-selling opportunities for Windows Live users and Skype users. Finally, Microsoft can use Skype to enhance the value pillars of its Windows Phone 7 offerings.”

Yun Kim, Gleacher & Co.
“While Skype’s technology can add to MSFT’s existing portfolio of communications software, we believe the true value within Skype is its 145 million-plus users, including its 8.8 million paying users. We believe Skype customers will likely be introduced to various MSFT products and potentially boost many of MSFT’s businesses. We see an immediate opportunity for MSFT to introduce its search engine, Bing, to the Skype platform. We also see tighter integration of Skype and its smartphone platform, Windows Phone 7, which could boost adoption of its fledgling mobile platform. Furthermore, Skype technology can add additional value to MSFT’s current enterprise offering and its Xbox franchise….At current valuation, we do not see much downside risk to this acquisition.”

Neil Herman, Soleil Securities
“While $8.5 billion is clearly a big number, Microsoft, in order to have a meaningful impact to its top line long-term, needs to go after multi-billion revenue opportunities, of which, internet telephony, is clearly one of them. Furthermore, Microsoft has been the number two in a number of markets that benefit from the networked effect. By going after Skype, Microsoft would clearly be the number one player in this segment, benefiting from the networked effect and scale. Additionally, at some point, Skype may become an alternative to traditional telephony, a potential multi-billion revenue opportunity. As a reminder, Microsoft has about $50 billion in cash and generates about $2 billion in operating cash flow every month.”

Kevin Buttigieg, Collins Stewart
“[This isn’t] the kind of transformative deal investors may have liked to see Microsoft do with $8.5 billion….Skype is a large deal at a relatively expensive price that doesn’t transform any MSFT business quickly or in a way which improves perception about its ability to compete in a post-PC world.”

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