Download - Microsoft A

Microsoft & Skype

Kristoffer Hagstedt, Emelie Håkansson, Johan Thideman

Corporate Strategy 2011

Agenda

Sunday den 11 December 2011 1 D-MTEC, Corporate Strategy – Skype Microsoft Case Study

1.  Introduction •  Purpose and key questions •  Key facts and figures of the acquisition •  Conclusion

2.  Skype •  History •  Business Model •  Sustainability of Skype’s Business Model

3.  Microsoft •  History •  Business Model •  Product portfolio

4.  Analysis of the rational behind the acquisition •  SWOT-analysis of Microsoft (pre-acquisition) •  Microsoft’s objective and strategy (buying rather than developing) •  Benefits and synergies •  Possible Issues with the Acquisition

5.  Conclusion •  Why Microsoft acquired Skype

Agenda Introduction Skype Microsoft Analysis Conclusion

Purpose


§  The purpose of this study is to analyze Microsoft’s reasoning behind the acquisition of Skype, as well as to come up with a recommendation regarding how Microsoft best benefits from the acquisition.

§  Understanding Skype’s and Microsoft’s business models and their

product portfolio respectively.

§  Why buy instead of developing similar technology?

§  How can Microsoft benefit and which synergies can be obtained from

the acquisition?


Key facts and figures (1:2)



§  Early May, 2011: rumors that Skype would enter a joint venture, or be acquired for $3-$4 billion by either Google or Facebook

§  10th May 2011: Microsoft acquirers Skype at a price of $8.5 billion (cash)

§  Financial multiples (Skype 2010): §  Enterprise value/EBITDA: > 32x

⇒ Very high relative to other companies within the IT sector!

Key facts and figures (2:2)

Sunday den 11 December 2011 4

D-MTEC, Corporate Strategy – Skype Microsoft Case Study


§  However, Skype is growing rapidly (from 2009 to 2010): §  User base: 40% §  Calling minutes: 150% (18 months) §  Revenue: 20% §  EBITDA (adj.): 40%

Conclusion

Sunday den 11 December 2011 5



Microsoft bought a complementary company, hence Skype mirrors many of Microsoft’s existing products and in our opinion can Microsoft leverage Skype in several ways. §  Pros:

§  Acquisitions is in line with the company’s growth strategy §  Prevent competitors from acquiring Skype §  Skype’s technology is complementary to MS products and can be

integrated in all of the company’s business segments §  The company got access to Skype’s large customer base

§  Cons: §  Concerns about the high acquisition price §  Problems to integrate (retaining employees, organizational etc.)



“Skype is communications software whose purpose is to break down barriers to communication. With an Internet-connected device, families, friends and colleagues can get together for free with messaging, voice and video. At low cost, they can also call landlines or mobiles virtually anywhere in the world.”

- Skype press, 2011

Skype’s history



2010

2011

2007

Founded by Niklas Zenström &

Janus Friis

2003

2005 2009

eBay Inc. acquire Skype for $2.6 billion (Oct.14)

$900 million accounting write down (Oct.1)

Skype files for a U.S. IPO (Aug.9)

eBay sells a two-thirds stake to an investment group led by

Silver Lake for roughly $2 billion – valued at $2.75 billion (Nov.19)

Microsoft Corp. agrees to buy Skype for $8.5 billion

(May 10)

Skype’s business model



§  Freemium §  Free-of-charge services (e.g. Skype-to-Skype calling, video

calling, chat, multi-party calling, file transfer) §  Premium services (e.g. subscriptions, SkypeOut, Online

numbers, Voicemail, SMS)

§  Other revenue streams: §  Partnership perspective (licensing opportunities) §  Advertising opportunities (platform launched 2011)

How sustainable is Skype’s BM? (1:3)



“Communications is no longer just about voice; it’s now multi-modal: mood messages, chat, voice calling, multi-party calling, video calling and online screen sharing. Where and how we communicate is expanding: laptop, mobile phone, flat panel TV’s – “any connected computing device with the addition of software becomes a communication device.”

- eBay CEO John Donahoe (2009)




§  Pros §  Communication paradigm shift

§  Hardwired networks and devices => software-based networks and flexible devices

§  Enormous market size - communication industry (2009): §  $300B EBITDA §  $1.4T industry revenue ( ≈ compared to the total revenues of ecommerce

and Search) §  > 650 million users => key resource that enables network effects §  Manages no physical network (peer-to-peer technology) => good and cost

efficient scalability opportunities §  Strong focus on their core competence, i.e. telecommunication §  Pre-funded accounts => no risk of loss of receivables §  Strong free cash flow conversion => high margins




§  Cons §  Customers rely on access to the internet provided by companies that compete with

Skype §  Rapid technology change §  Low security §  Does not guarantee high sound quality §  Strong competitors and low exit barriers for customers

§  iChat §  Google Voice §  Apple FaceTime §  Facebook Chat §  Viber

§  A challenge to keep existing and attain new users

Microsoft’s business description (1:2)


§  World’s largest software company based on software revenue

§  Microsoft’s mission is to create technology that transforms the way people work, play and communicate.


Microsoft’s business description (2:2)



Microsoft’s product portfolio (1:2)


§  Microsoft have a broad range of products §  Main products (by business segments):

§  Home: Windows Live Hotmail, xBox, Kinect, Windows Live Messenger

§  Office: Lync, Exchange Server §  Home & Work: Windows §  Anywhere: Windows Phone


Microsoft’s product portfolio (2:2)



Source: http://infographipedia.com/infographic-skype-from-conception-to-acquisition-rasdroid.html

SWOT analysis – Microsoft (1:2)



Strengths

•  Global brand

•  Multinational company

•  Large customer base

•  Rapid product development

•  “Dominant Design” - Windows is the standard OS and complementary goods are adapted to it.

•  High compatibility

•  High liquidity (Cash and cash equivalents of $ 52,772 millions in 2011)

•  Broad product portfolio

Weaknesses

•  Small market share within the web search business

•  Low flexibility due to size

•  Browsers

•  No current OS in mobile phones

•  Weak in the telecommunication market

SWOT analysis – Microsoft (2:2)



Opportunities

•  Further development of their products, e.g., Office, Xbox 360

•  Windows Phone 7

•  Providing the customer with the full “software environment”. (e.g. Operating system, email, chat, scheduling, entertainment, and voice communication)

Threats •  Increased market of open source

software e.g. Linux •  High bargaining power of buyer •  Strong competition •  Risk of hostile takeover due to large

amount of cash •  File sharing – less people pays for

software •  New OS in phones à Android/apple

can lead to a paradigm shift in OS for computers

Microsoft’s objective and strategy (why buying rather than developing)



§  Strategic partnerships and acquisitions is a part of Microsoft’s core strategy “Strategic partnerships and acquisitions have always played an important role in Microsoft's strategy for growth and technology leadership.”

- Steven A. Ballmer (Microsoft CEO)

§  Time is a critical factor in this business àit takes much longer time to develop a well functioning product themselves than to acquire.

§  By buying Microsoft gets Skype’s existing customer base à leverage the network effect

§  Large pile of cash is being put to work

Benefits and synergies of the acquisition (1:2)



§  Strategic reason §  In line with Microsoft’s growth strategy §  Prevent competitors such as Google and Apple from buying

§  Product reason §  Skype is the perfect complement to Microsoft’s existing products

§  Live video chat on Windows computers and Xbox 360

§  Communication when working with Microsoft Office

§  Call-back and instant messaging features in Outlook

§  Increase competitiveness on the Windows Phone 7 mobile platform

§  Network reason §  Leverage the network effects

§  Direct line communication with Skype’s large customer base (ca.700 million)

§  Connect Skype users with Lync, Outlook, Xbox Live and other communities

Benefits and synergies of the acquisition (2:2)


“Skype is a perfect fit with Microsoft's core vision to unleash our customers' productivity and creativity by making it easier for them to communicate and work together. With the acquisition of Skype and requisite regulatory approval, we'll connect hundreds of millions of people and provide them exciting new ways to communicate and create on PCs, phones, the Xbox, and through applications like Office and Lync.”

- Steven A. Ballmer (Microsoft CEO)


Possible issues with the acquisition


§  High price §  Skype is growing quickly

§  Value is exponential correlated with number of user

§  Price/user: Skype 12 $ à Facebook 62 $

§  Hard to integrate §  Ebay had a hard time integrating

§  Skype complementary to Microsoft’s business strategy


Conclusion



Microsoft bought a complementary company, hence Skype mirrors many of Microsoft’s existing products and in our opinion can Microsoft leverage Skype in several ways. §  Pros:

§  Acquisitions is in line with the company’s growth strategy §  Prevent competitors from acquiring Skype §  Skype’s technology is complementary to MS products and can be

integrated in all of the company’s business segments §  The company got access to Skype’s large customer base

§  Cons: §  Concerns about the high acquisition price §  Problems to integrate (retaining employees, organizational etc.)

Microsoft & Skype Thank you for your time!

Kristoffer Hagstedt, Emelie Håkansson, Johan Thideman

Back Up – Price per share

§  The following information was collected to calculate dollars per user.

Sunday den 11 December 2011 Back Up D-MTEC, Corporate Strategy – Skype Microsoft Case Study

Source: http://techcrunch.com/2011/01/21/facebook-raises-1-5-billion-at-50-billion-valuation/ https://www.facebook.com/press/info.php?statistics http://www.ibtimes.com/articles/143246/20110510/skype-key-facts-about-what-microsoft-acquire-buy-8-5-billion-merger-facebook-google.htm http://www.microsoft.com/presspass/press/2011/may11/05-10corpnewspr.mspx

Back Up - Skype’s revenue streams


§  User services §  Free §  Paid

§  Partnership perspective (licensing opportunities) §  Advertising opportunities (platform launched 2011)

Back Up – Economic multiples

Sunday den 11 December 2011 Back Up


Sources: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html (compared) http://blogs.vccircle.com/500/healthy-airhotel-travel-trends-to-benefit-makemytrip/ http://tradingfloor.com/blogs/equity-daily-theme/microsofts-acquisition-of-skype--a-square-peg-in-a-round-hole-1220314633

Skype 2011

The average value of Enterprice value/EBITDA for Computer Software (Svcs) is 10.8.


2003 •  Founded by Niklas Zennström and Janus Friis •  Beta software launched publicly

2005 •  eBay Inc. acquire Skype for $2.6 billion (Oct.14)

Back Up – Skype’s history (1:3)


2007 •  $900 million accounting write down (Oct.1)

2009 •  eBay announces a spin off of Skype through an IPO (April 14) •  eBay announced it will sell 65 % stake in Skype (Sept.1) •  eBay sells a two-thirds stake to an investment group led by

Silver Lake for roughly $2 billion – valued at $2.75 billion (Nov.19)



2010 •  Skype files for a U.S. IPO (Aug.9) •  Replaces CEO Josh Silverman with former Cisco senior VP,

Tony Bates (Oct.4)

2011 •  Skype announces a launch of a advertising platform (March

7) •  Microsoft Corp. agrees to buy Skype for $8.5 billion (May 10) •  Microsoft’s acquisition of Skype got EU approval (Oct. 7)



Back Up – Skype’s historical valuation (1:2)

Sunday den 11 December 2011 Back Up


The peek in the valuation of Skype between year 2009 and 2011 is a result of the new growth strategy that includes corporate subscription packages. One goal is to increase market share in the business segment, which contributes to more revenue than regular customers. Under this timeframe the monthly calling minutes increased with 150 % and new revenue streams have been developed.

Back Up – Skype’s historical valuation (2:2)


1975 •  Founded by Bill Gates and Paul Allen (April 4)

1981 •  Signed a contract with IBM to provide an OS for the IBM PC (Aug.12)

1983 •  Microsoft released Microsodt Word (Oct.1)

1985 •  First version of Windows launched (Nov. 20)

Back Up – Microsoft history (1:2)

Back Up - Microsoft’s history (2:2)


1995 •  Windows releases Windows 95, the replacement of MS-DOS (Aug.24)

2001 •  Microsoft XP released, the replacement of Windows 95(Oct.25) •  Microsoft launches the Xbox (Nov.15)

2003 •  Windows Mobile, the OS for smartphones and PDAs was announced

(Jun.23)

2005 •  Gates leaves Microsoft

2010 •  Apple comes close to passing Microsoft as the worlds most valuable

technology company in the US

Back Up - Microsoft’s business description


§  Microsoft’s mission is to create technology that transforms the way people work, play and communicate.

§  Revenue streams: §  Develop, license, and support a wide range of software

products and services §  Designing and selling hardware §  Delivering relevant online advertising to a global

customer audience. §  Selling individual products and services, we offer suites

of products and services.

Back Up - Microsoft’s intentions with the acquisitions


§  Microsoft will according to CEO Steve Ballmer: §  Integrate Skype with their product portfolio §  Optimize Skype for the TV, with xBox and Kinect as

well for Windows Phone and Windows PC §  Connecting the users of Skype with the user of their

Outlook products §  Use the customer base of Skype to connect to Lync

Back Up - Reasons for acquisition (theory)


•  Increasing the market position

•  Improved profit or reduced costs

•  Synergies - financial, operating and management

•  Increase the product line

•  IPO

•  Avoid competitors to buy the acquired company

•  The managers are more interested in gaining empire than value creating for shareholders

•  Receive more information about the financials of the acquired company than stated on the market stock

•  Intellectual property

Microsoft’s objective and strategy (buying rather than developing)


2010

•  Advertising partnership – Bing (Microsoft), Yahoo and AOL

2011 •  Partnership with Nokia – Windows Phones (Feb) •  Partnership with Facebook – personalized search results

based on friends’ opinions (may) •  Intention to acquire Skype – new ways of communicate (may)

References (1:2) §  http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html (compared) §  http://blogs.vccircle.com/500/healthy-airhotel-travel-trends-to-benefit-makemytrip/ §  http://www.tradingfloor.com/blogs/equity-daily-theme/microsofts-acquisition-of-skype--a-square-peg-in-a-round-

hole-1220314633 §  See: http://www.tradingfloor.com/blogs/equity-daily-theme/microsofts-acquisition-of-skype--a-square-peg-in-a-round-

hole-1220314633 §  http://blogs.vccircle.com/500/healthy-airhotel-travel-trends-to-benefit-makemytrip/ §  http://information.anu.edu.au/daisy/infoservices/945.html §  http://www.slideshare.net/bonics/skype-anlaysis §  http://www.microsoft.com/investor/reports/ar11/index.html §  http://www.businessweek.com/news/2011-03-04/microsoft-said-to-plan-windows-release-for-tablets-in-2012.html §  http://www.softwaretop100.org/global-software-top-100-edition-2011-the-highlights §  http://www.microsoft.com/investor/reports/ar11/index.html §  http://www.microsoft.com/investor/reports/ar11/shareholder_letter/index.html §  http://www.reuters.com/article/2011/11/08/us-microsoft-aol-yahoo-idUSTRE7A77HP20111108 §  http://www.microsoft.com/investor/reports/ar11/shareholder_letter/index.html §  http://techland.time.com/2011/05/10/a-brief-history-of-skype/ §  http://www.microsoft.com/investor/reports/ar11/shareholder_letter/index.html §  http://techcrunch.com/2011/01/21/facebook-raises-1-5-billion-at-50-billion-valuation/

Sunday den 11 December 2011 Back Up Departement/Institut/Gruppe

References (2:2) §  https://www.facebook.com/press/info.php?statistics §  http://www.ibtimes.com/articles/143246/20110510/skype-key-facts-about-what-microsoft-acquire-buy-8-5-billion-

merger-facebook-google.htm §  http://www.microsoft.com/presspass/press/2011/may11/05-10corpnewspr.mspx §  http://www.microsoft.com/investor/reports/ar11/financial_review/general.html §  http://www.pcmag.com/article2/0,2817,2393804,00.asp §  http://news.brothersoft.com/forbes-skype-changes-its-growth-strategy-34.html §  http://www.microsoft.com/presspass/press/2011/may11/05-10corpnewspr.mspx §  http://webtrends.about.com/od/profi3/p/Microsoft-bio.htm §  http://exclusiveeconomy.com/2011/03/microsoft-history-timeline/

Sunday den 11 December 2011 Back Up Departement/Institut/Gruppe