Skype Gets 40% Markup as Microsoft Surprised Owners: Real M&A - San Francisco Chronicle

May 11 (Bloomberg) -- Microsoft Corp. is paying a dot-com era price for Skype Technologies SA, almost 40 percent more than the world's most popular Internet calling service itself says the business is worth.

Microsoft, the world's largest software company, agreed to pay $8.5 billion for Luxembourg-based Skype, which lost money in four of the past five years even as it quadrupled sales. The takeover, the largest for an Internet company since May 2000, is 32 times Skype's adjusted earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That's 39 percent more than the multiple Skype used to value its own equity in an April regulatory filing.

Microsoft Chief Executive Officer Steve Ballmer is betting the biggest acquisition since the company was founded in 1975 will help reverse past failures and enrich owners who lost out as shares of Google Inc. and Apple Inc. quadrupled Microsoft's gain in the past five years. By buying Skype, Microsoft may lure more users to its mobile-phone platform and narrow Google's lead in Internet advertising after reporting its worst two-year stretch of sales growth. Shareholder Hank Smith of Haverford Trust Co. says the investment isn't worth the price.

"I just thought, 'You've got to be kidding me,'" said Smith, chief investment officer at Haverford Trust, which oversees $6.5 billion in Radnor, Pennsylvania, and owns about 1.96 million Microsoft shares. "They don't have a great track record of 'investments.' It almost brings you back to those crazy valuation metrics in the late '90s."

'Frittered Away'

You can make a case that Microsoft has "frittered away capital," said Smith, who wants Microsoft to use its $50.2 billion cash pile on dividends and buybacks. "It's definitely because of the competition with Apple and with Google."

"It's not low for sure," Ballmer, 55, said of Skype's acquisition price in a telephone interview yesterday. "It requires we do good work both within the Skype division and in creating value elsewhere in the company."

Ballmer added that Microsoft didn't overpay and the transaction values Skype at "not a lot higher" than some publicly traded companies. He expects the deal will add to Microsoft's profit in the year after it closes.

Jennifer Caukin, a spokeswoman at Skype, didn't respond to an e-mail requesting comment.

Microsoft's reserves give it the ability to pay for what it needs and Skype offers a way for Microsoft to diversify its products to compete with Apple and Google, according to Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $3.6 billion including Microsoft shares.

'Another Hamburger'

"$8.5 billion in cash for a Microsoft is like you and I paying five bucks for another hamburger," McCormick said. "Microsoft right now is trying to do things to keep up with other faster growing technology companies. This is the way to do it. I will give them the benefit of doubt."

Microsoft, based in Redmond, Washington, is buying Skype from investors including private-equity firm Silver Lake and the Canada Pension Plan Investment Board, which took a controlling stake in November 2009 that valued the company at $2.75 billion.

Microsoft's offer is more than twice that amount and includes the assumption of Skype's debt. Skype had about $725 million in borrowings and a revolving credit line of $30 million, a Securities and Exchange Commission filing in April showed. Skype had planned to raise money in a U.S. initial public offering this year, according to the prospectus.

Fair Value

The acquisition values Skype at about 32 times its $264 million in adjusted Ebitda in 2010, a 39 percent markup to the company's own assumptions. At the start of the year, Skype used a trailing 12-month Ebitda multiple of 23.2 times to determine the "fair value" of its common stock, its filing showed.

While Skype had a total of 663 million users, it has only converted 8.8 million users of its free PC-to-PC phone services into paying customers, according to the filing.

Skype reported a net loss of $6.9 million last year, its fourth money-losing year since 2006, its filing showed.