Nasdaq-listed software provider Microsoft has agreed to buy Skype Global for an $8.5bn enterprise valuation and giving a $1.4bn overall return over six years to online auction company eBay that owned 30% of the internet communications operator.
Of the purchase price by Microsoft, $686m will repay Skype’s debt leaving an equity value of $7.8bn, of which about $2.3bn will go to eBay. EBay said since its original investment it had made $1.4bn profit on an overall return of about $4.6bn.
An eBay spokeswoman said: “Skype is a great business with a strong future. This deal represents Skype’s long-term growth potential. And, it gives our shareholders a strong return of approximately $1.4bn on our original investment for a dynamic business that simply wasn’t core to our focus on global payments and commerce.”
Skype said eBay had retained its 30% stake worth a then-$700m when it had sold the majority of the phone operator to its founders and private equity firms in November 2009, according to a regulatory filing by Skype. EBay also received $1.9bn in cash and a $125m note for the shares it was selling, but retained a 50% liability for the legal action over intellectual property rights then underway by the phone operator with the Joltid investment vehicle. Skype settled that legal action for a gross $378.4m, according to its regulatory filing.
The founders of Skype, Janus Friis and Niklas Zennström, owned Joltid and regained up to 14.4% of the business (now worth more than $1.1bn) through the buyout, including 1% in warrants, according to the Skype regulatory filing ahead of its planned flotation before Microsoft agreed to buy the phone operator. The other investors in the 2009 buyout consortium were Silver Lake Partners, Andreessen Horowitz and CPP Investment Board, the asset management unit of the Canada Pension Plan.
Friis and Zennström had set up Skype in 2003 and sold it to eBay for an estimated $3.3bn in September 2005, according to news provider Wall Street Journal. (Editor’s note: a valuation I had made in my article for the WSJ based on the share price of eBay during the sale of stock by its venture capital backers, such as Index Ventures, from regulatory filings and so slightly higher than the headline price of $2.6bn.)
Skype had subsequently become an investor in Atomico, Zennstrom’s venture capital firm’s first institutional fund, by committing $10m. Skype has also been a co-investor in one of Friis’ other companies, Rdio, that is also backed by Atomico.
For Microsoft, which already partners with phone maker Nokia, Skype brings a service with 170 million connected users and over 207 billion minutes of voice and video conversations last year. Skype then fits with Microsoft’s real-time communications across its various platforms, including Lync, Outlook, Messenger, Hotmail and Xbox Live.
Skype had warned in its regulatory filing one of the main competitive threats came from internet and software companies with email services attached, such as Outlook and Hotmail, while Microsoft also owns a minority share in social media platform Facebook
The deal allows Skype to be better prepared for the challenge of search engine group Google, which has its Gmail email service and last year bought Global IP Solutions, the back end voice-over-internet-protocol (VoIP) engine for Yahoo, AIM, Baidu and Lotus chat, in May 2010 for $68.2m.
Skype also works with Google already after buying Qik, a video streaming option for Google’s mobile phone operating system Android, and which was part-owned by Andreessen Horowitz, for $150m including $29m in performance fees last year. (For an interview with Ben Horowitz about the Skype deal go to Fotune by clicking here.)
Microsoft said it would continue to invest in and support Skype clients on non-Microsoft platforms.
Thierry Monjauze, managing director at investment bank Harris Williams, said: "This move by Microsoft seems to be to a large extent defensive in order to keep Skype out of the hands of Google. Although there are synergies between Microsoft and Skype, including the integration of telephony and VoIP to Microsoft’s communications products, the purchase price is no doubt excessive and it’s hard to believe that it is the most cost-effective way of getting access to the Skype technology. Even access to the 8 million customers paying for the service is hard to justify. The terms of the deal mean that for each Skype customer, Microsoft is paying about $1,000, on average, but actually only worth a profit of about $30 each."
Skype will become a new business division within Microsoft, and Skype chief executive (CEO) Tony Bates will assume the title of president of the Microsoft Skype Division, reporting directly to Steve Ballmer, Microsoft’s CEO (pictured, left, with Bates).
Last year, Skype had revenues of $860m and $264m in operating profits.
Investment banks Goldman Sachs and JP Morgan advised Skype and had been the two lead advisers for its planned flotation, which also had Morgan Stanley as its third lead underwriter on the initial public offering. Microsoft used no advisers as 13 investment banks were slated to work on the IPO taking out most of the advisory market.