The acquisition of internet voice and video calling giant Skype by Microsoft for at least $8 billion is being reported as a done deal this morning. Skype has been shopped around ever since it was spun-off by previous acquirer eBay. While there was talk of an IPO, previous rumoured suitors included Google and Facebook.
At the time of the proposed IPO almost two years ago, Skype's owners valued the company at $2.7 billion. There's little evidence that Skype has tripled its intrinsic value since then, so it looks like Microsoft is paying quite a premium, possibly as a result of a bidding war.
The motivation for the deal is thought to be threefold:
1. Unified Communications (UC) - Microsoft has already got the text-based side of this covered with Exchange, Messenger, etc, but it's not so strong on voice, and more importantly video. Its biggest UC competitor is Cisco, which is very strong on video conferencing, so this should help.
2. Consumer Internet presence - This would mark merely the latest pile of cash Microsoft has thrown at taking on Google as a consumer Internet player. Products such as Bing, Internet Explorer and Windows Live already go head-to-head with Google, but progress has been slow and expensive. Skype would give Microsoft 663 million registered users.
3. Mobile video calling - Apple has Facetime and Google has Google Talk. The two main competitors to Windows Phone 7 already have established Internet calling and video calling apps for their platforms. The absence of an equivalent service on WP7 would be an Achilles heel.
But such rationale notwithstanding, Microsoft will probably be criticized for this deal. The main issue is likely to be the price, but people will also point to Microsoft's poor track record at making big acquisitions work. Having said that, it needs to address all the areas detailed above, and acquiring Skype would give it a fighting chance to do so.