[FoRK] MS Skynet: Microsoft Buys Skype for $8.5B

Stephen Williams sdw at lig.net
Thu May 12 06:24:52 PDT 2011

More interesting details. Seems like Ballmer is getting desperate. They'll have fun watching the Google IO keynotes.
Skype does have $800M in revenue, which is impressive. Seems like fragile positioning, although the installed base will carry them 
for a while in any case.

Skype Is Said to Have Demanded More Than $7 Billion in Talks
May 11, 2011, 12:24 AM EDT
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By Dina Bass, Douglas MacMillan and Joseph Galante

May 11 (Bloomberg) -- Skype Technologies SA’s owners refused to entertain offers of less than $7 billion, the value they expected 
the startup to get from a planned initial public offering, before agreeing to a buyout from Microsoft Corp., according to people 
with knowledge of the talks.

Microsoft Chief Executive Officer Steve Ballmer clinched the $8.5 billion all-cash agreement May 9, just more than a month after his 
initial overture to private equity firm Silver Lake, one of Skype’s biggest owners, said the people, who asked not to be identified 
because the talks were private.

“Microsoft really wanted this,” said Matt McCormick, a money manager for Cincinnati-based Bahl & Gaynor Inc., which oversees $3.6 
billion, including Microsoft shares. “Microsoft right now is trying to do things to keep up with other faster- growing technology 

Ballmer, 55, is making Microsoft’s largest acquisition on a wager he can use Internet calling to play catch-up in mobile and Web 
advertising. He offered more than $7 billion to cover Skype’s debt and keep a rival from gaining a business that would add calling 
features to games, e-mail and software on computers and handsets. While Google Inc. expressed interest, neither it nor other bidders 
made formal offers, the people said.

Microsoft, based in Redmond, Washington, is making the biggest Internet takeover in more than a decade, part of an effort to lure 
Web users and advertisers and help it catch Google in online advertising and Apple Inc. in mobile software.

‘Needed Kick-Start’

Ballmer plans to connect Skype, which boasts 170 million active users, to Microsoft’s Outlook e-mail, Xbox game console, Windows 
mobile phones and corporate-phone software. Skype offers voice and video calling over the Internet.

“This could give Microsoft a much-needed kick-start” in telecommunications, said Paolo Pescatore, an analyst at CCS Insight in 
London. In voice services, “Skype has certainly set the benchmark and gained a lot of traction.”

Microsoft was already negotiating a partnership with Skype when Ballmer kicked off takeover discussions. He said in an interview 
that he opted to pursue an acquisition after consulting with the leaders of the Office and Windows divisions.

Ballmer said he then directed Chief Financial Officer Peter Klein to make an unsolicited takeover offer to Silver Lake. Talks began 
in late March, the people familiar said.

Ballmer led Microsoft’s efforts and kept the plans secret outside of a small team, which included Microsoft Business Division Chief 
Financial Officer Amy Hood and Marc Brown, who oversees corporate development, one of the people said.

No-Shop Clause

Microsoft’s negotiators insisted on a no-shop clause, which barred Skype from seeking other bidders, according to one person 
familiar with the matter.

The parties agreed on a price in mid-April and signed the deal the night before it was announced. Microsoft paid a high premium in 
part because it expected the stock to rise after the IPO, meaning it would cost more to acquire Skype down the road, two of the 
people said.

“Microsoft was the only serious bidder at that number,’’ Marc Andreessen, co-founder of Skype investor Andreessen Horowitz, a 
venture capital firm, said in an interview.

Skype’s backers also talked with Google but didn’t get to discussing a price, and no formal offer was made, two people said. There 
were no other serious offers, one of them said.

The deal will add to Microsoft’s profit in the year after it closes, Ballmer said in an interview yesterday.

Microsoft slipped 16 cents to $25.67 yesterday in Nasdaq Stock Market trading. That left it down 8 percent this year.

‘Deadly D’

Microsoft also may get a tax benefit from the deal. Klein said the company will pay for the purchase using cash held overseas, 
freeing it from having to pay taxes associated with bringing cash into the U.S.

The company may use a technique known as the “Deadly D,” named for a section of tax law, that can help reduce taxes in cases where a 
U.S.-based company makes a foreign acquisition, said Robert Willens, who owns a tax consulting firm in New York.

“As far as the tax implications, this is a sweetheart deal,” Willens said. “This will be seen as a real important aspect of deal and 
will make Microsoft investors more comfortable with the transaction.”

Skype CEO Tony Bates will be president of the Microsoft Skype Division, reporting to Ballmer. The agreement was approved by the 
boards of both companies. Microsoft expects to receive regulatory clearance for the purchase this year.

Skype was founded in 2003 by Niklas Zennstrom and Janus Friis. The founders sold the company for $2.6 billion in 2005 to San Jose, 
California-based EBay Inc., which in turn sold off most of its stake four years later. Current investors include EBay, Silver Lake 
and Andreessen Horowitz.

IPO Plans

A purchase by Microsoft would divert unprofitable Skype from a plan, announced in August, to sell $100 million of shares in an IPO. 
The company has struggled to convert users of its free PC-to-PC phone services into paying customers, according to a March 
regulatory filing. The company has 663 million total users, most of whom aren’t active callers.

The purchase of Skype surpasses Microsoft’s acquisition of AQuantive Inc. for about $6 billion in 2007. It’s also the biggest 
takeover of an Internet company since the dot-com bubble 11 years ago, data compiled by Bloomberg show. Microsoft abandoned an 
unsolicited effort to buy Yahoo! Inc. for as much as $47.5 billion in 2008 and instead struck an agreement to provide search 
services on Yahoo’s pages.

Microsoft offers corporate telephone services through its Lync product, as well as consumer video-chat products as part of its 
instant-messaging software and Xbox online service.

Skype as Verb

Tightly integrated Skype services could be an added selling point for Windows Phone, the mobile operating system Microsoft is 
promoting as to vie with Google’s Android and Apple’s iOS, said Colin Gillis, an analyst at BGC Partners LP in New York.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. advised Skype on the deal. Skadden, Arps, Slate, Meagher & Flom LLP provided legal 
advice to Skype’s founders. Microsoft declined to disclose its bankers. Simpson Thacher & Bartlett LLP and Covington & Burling LLP 
are providing legal advice to Microsoft, and Sullivan & Cromwell LLP is advising Skype and Silver Lake.

Bloomberg LP, which owns Bloomberg News, is an investor in Andreessen Horowitz.

Skype has more than $800 million in annual revenue, Ballmer said yesterday. His forecast for Skype’s impact on earnings refers to 
profit excluding certain costs.

Microsoft is planning to keep and promote the Skype brand.

“We love the Skype brand -- it’s a verb, for gosh sakes,” Ballmer said in the interview.

--With assistance from Serena Saitto, Amy Thomson, Sarah Rabil and Rita Nazareth in New York and Brian Womack and Cris Valerio in 
San Francisco. Editors: Tom Giles, Nick Turner

To contact the reporters on this story: Dina Bass in Seattle at dbass2 at bloomberg.net; Joseph Galante in San Francisco at 
jgalante3 at bloomberg.net; Douglas Macmillan in San Francisco at dmacmillan3 at bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5 at bloomberg.net

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