CORPORATE VALUATION AND MERGERS AND ACQUISITION

THE CASE ON MERGERS AND ACQUISITION

TO: MR G. SHRIDHARAN BY: SAKSHI MALIK ROLL NO. : 75

INTRODUCTION:
Microsoft Corp. (Nasdaq: MSFT) and Skype Global have entered into a definitive agreement under which Microsoft will acquire Skype, the leading Internet communications company, for $8.5 billion in cash from the investor group led by Silver Lake. The agreement has been approved by the boards of directors of both Microsoft and Skype. The acquisition will increase the accessibility of real-time video and voice communications, bringing benefits to both consumers and enterprise users and generating significant new business and revenue opportunities. The combination will extend Skypes world-class brand and the reach of its networked platform, while enhancing Microsofts existing portfolio of real-time communications products and services. The sellers include eBay Inc. and private equity firms Silver Lake and Andreessen Horowitz, CPP Investment Board, Joltid Limited in partnership with Euro play Capital Advisors. Skype have a huge market penetration that Microsoft can exploit with tight integration to existing solutions, but Skype already has well established processes and billing mechanisms that Microsoft can use for up-selling and cross-selling while entering the communication business both for individuals and corporate markets.

MOTIVE OF ACQUISITION: MICROSOFT

Despite being a front-runner in the computer software market, Microsoft had been losing market share to Google in the online search space. Microsoft used to rule with Hotmail but lost the crown to Yahoo and Gmail. Its been losing the browser battle to Firefox and Chrome. Losing the Windows Phone battle to Apple and Google. Therefore, the reasons for Microsoft buying the company are completely strategic.

MOTIVE OF ACQUISITION: SKYPE

Skype recorded $859.8 million in revenue and a net loss of $7 million in 2010, according to a recent filing. The previous year, the loss exceeded $300 million. Skype had filed for an IPO, was going to do about a billion dollars in revenues, and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. Some sources also believe Skypes revenues had stalled.

The synergy benefits in the case:

The acquisition will increase the accessibility of real-time video and voice communications, bringing benefits to both consumers and enterprise users and generating significant new business and revenue opportunities. The combination will extend Skypes world-class brand and the reach of its networked platform, while enhancing Microsofts existing portfolio of real-time communications products and services. As said Tony Bates Microsoft and Skype share the vision of bringing software innovation and products to our customers,. Together, we will be able to accelerate Skype's plans to extend our global community and introduce new ways for everyone to communicate and collaborate Skype will support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities. Microsoft will continue to invest in and support Skype clients on non-Microsoft platforms. Skype gives Microsoft a boost in the enterprise collaboration market, thanks to Skypes voice, video and sharing capabilities, especially when competing with Cisco and Google. It gives Microsoft a working relationship with carriers, many of them looking to partner with Skype as they start to transition to LTE-based networks. It would give them a must-have application/service that can help with the adoption of the future versions of Windows Mobile operating system. However, the biggest reason for Microsoft to buy Skype is Windows Phone 7 (Mobile OS) and Nokia. The software giant needs a competitive offering to Google Voice and Apples emerging communication platform.

There are some reasons why Microsoft is buying Skype. 1) To inject excitement into existing Microsofts products Microsoft is buying Skype, which has 170 million active users, to connect the service to its Outlook e-mail, Xbox game console, Windows mobile phone and corporate-phone software. Somehow it thought it was a freaking cool idea in allowing users to easily call their friends and colleagues with Skype integrated into the products. 2) To rejuvenate Microsofts advertising revenue Ballmer is aiming to revive Microsofts Internet advertising revenue. The companys online services division had an operating loss of almost $2.6 billion in the 12 months ended March. Microsoft has been trying but is still eating dust behind Google in web search and related advertising. Ballmer is hoping Skype which would start showcasing advertising could help Microsofts Bing search engine in the online-search market hope to narrow the huge gap between its Bings 14% versus Googles 66%. 3) To lure more users to its Windows Phone 7 Microsoft plans to add Skype to its Windows-based mobile phones to lure more customers after losing ground to Apples iPhone and Googles Android devices. It was also hoped that Skype can help boost the popularity of Windows-powered devices such as tablet computers. Its all about competition and Microsoft hates Apple and Google very much. 4) To prevent rival Google from buying Skype As much as Google likes to tell everyone that it has Google Voice so it doesnt really need Skype, the fact remains that Google Voice is nowhere near Skype. It would be nice to add Skype into Googles portfolios but not at crazy-price. But Microsoft simply cannot afford to sleep only to wake up one fine day that Google has bought over Skype. That would be disastrous and with deep

pockets, it would be better to buy Skype and let it rot even if the deal is proven to be a flop. 5) To diversify Microsofts traditional business For as long as you can remember, Microsofts business has relied heavily on sales of its Windows and Microsoft Office programs, which runs on hundreds of millions of computers. Its venture into other business such as search engine and Microsofts Windows Smartphones are nowhere near Google and Apple. Skype is a bet that may eventually turn into a gold mine, hopefully. 6) Microsoft is simply jealous of Apple and Google Microsoft is desperate to become relevant. Theyve tried everything on their own from Bing search engine to Windows Phone 7 but nothing seems to work and can put them as the leader on the latest technology map. Luckily they didnt manage to buy Yahoo the value of Yahoo has halved since then. Apple has just overtaken Google to become the most valuable brand and Microsoft brand ranking will only drifts further away if it doesnt do anything now. Of the top-10 valuable brands, Microsoft improves the least. Now Microsoft can claim it has a new sexy product on par with Google and Apple. 7) To have a stronger bargain power with carriers At the moment, carriers dont really care if Microsoft wants to work with them or not. Googles Android and Apples I Phone are sufficient in generating tons of money for the carriers. Now with Nokia behind Microsoft, Skype will be a must-have service/application that Windows Phone 7 can uniquely offers to the carriers. Surely Microsoft will still make Skype free of charge but youll never know. Maybe Skype can be tweaked to compete with Apples Face time.

VALUATION OF THE DEAL:

Skype is a private business and we know little about the insides of the financial statements. It is widely reported, though, that Skype had operating losses of $7 million on revenues of $ 860 million in 2010.

MICROSOFT IN NUMBERS 1975 Microsoft founded $217.82billion market cap worth $68.62billion turnover in 2010 $50.09billion pre-tax profit in 2010 -10.75 per cent share price drop over in 2010 350million Windows 7 licenses sold to date SKYPE IN NUMBERS 2003 Skype founded 663 million registered users $860m revenues last year and an operating profit of $264million $7million lost last year overall

$686million long-term debt 207 billion minutes of voice and video conversations in 2010

FINANCING THE MERGER:

Microsoft has around $50 billion in cash and cash equivalents on its balance sheet earning next to nothing. The company currently pays out a $0.64 annual dividend which equates to a 2.50% yield at current levels. The stock price has also been extraordinarily disappointing to investors. Over the last 10 years, MSFT has lost more than 27%. On the 5-year chart, the shares are up 7.86% and the stock has lost 11.3% over the last 52-weeks. On the plus side, investors probably won't go broke holding MSFT, but things need to change for anyone to make any money. On 22nd July 2010-Revenue across all divisions, with Windows and Windows live seeing the biggest uptick (43.5 percent to $4.55 billion) followed by Entertainment and Devices (27.3 percent to $1.6 billion). Operating income, on the other hand, paints a different picture of E&D, showing a $172 million loss for this quarter (compared to $141 loss in Q4 last year), but looking over the entire fiscal year, the home of Xbox and Zune this year did $679 million in operating income -- a sizable jump to the $108 million from 2009. The overall operating income for the company is $5.93 billion this quarter (net income $4.52 billion), a 49 percent increase over last Q4, and $20.36 billion for the year (18 percent compared with fiscal 2009). The $8.5 billion price tag is 32 times Skypes adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).

So Who Made What? Using the $8.5 billion price as the likely sale price, eBay gets $2.55 billion for its 30-percent stake in Skype. Niklas Zennstrm and Janus Friis, the co-founders, with their 14-percent stake, take home about $1.19 billion. Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB) own 56 percent of the company, and that stake is worth $4.76 billion.

 Andreessen Horowitz had 30 percent of the deal and made $205 million profit on their $50 million initial investment. BIBLIOGRAPHY: FOLLOWING ARE THE VARIOUS SOURCES FROM WHERE I HAVE COLLECTED THE DATA: NEWSPAPERS The Economic Times The Times of India, 10th May 2011 International Business Times, 11th May 2011 Business Today 15th May 2011 issue Investors Skeptical Of Microsoft's Skype Acquisition (MSFT) Tuesday May 10, 2011 - 19:49 PM EDT

Following Websites
http://www.financetwitter.com/2011/05/microsoft-skype-deal-seven-reasons-the-sucker-didit.html http://www.microsoft.com/presspass/default.mspx http://www.dailymail.co.uk/news/article-1385472/Microsoft-buy-internet-phone-serviceSkype-8-5bn.html http://www.ibtimes.com/articles/143750/20110511/skypes-owners-set-to-makebillionsource.htm http://www.itpro.in/625843/microsoft-closes-skype-deal-for-8-5-billion

As George Bernard Shaw famously said, We are made wise not by the recollection of our past, but by the responsibility for our future

THANK YOU Sakshi Malik