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May 10, 2011 – Comments (16) | RELATED TICKERS: MSFT

Microsoft has its fans, as well as a large group of haters. I am neither. Just like so many of us, I use their products. The quality is not all that good, but for a company with a near-monopoly in its core market not all that bad either. As an investor, I like their business model. The enormous amount of cash on their books is proof enough for me.

But yesterday's move to buy Skype is a clear sign that MSFT is a lost cause for investors. They are squandering $8.5B of their hard-earned cash on a company that has only produced losses. And as a former telecom business analyst, I don't see how it will ever become profitable. Don't get me wrong: I use Skype myself. But that is mainly because it is free. I will not use it for any service that costs me a penny. I don't recall ever having clicked on any advertising link while using the service.

So what am I missing here? Please, let me know in response to this blog. Because all I see right now, is a big sell signal for Microsoft!

16 Comments – Post Your Own

#1) On May 10, 2011 at 11:31 AM, chk999 (99.96) wrote:

This looks very bad from a capital allocation perspective. I would rather they had returned the 8.5B to the stockholders, rather than wasting it on a no-margin business like this.

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#2) On May 10, 2011 at 11:39 AM, TheDumbMoney (67.27) wrote:

I have been a defender of the value proposition in MSFT, and I'm an investor, wouldn't say I'm a "fan" to the extent that connotes an irrational or emotional liking.  I have to say my initial reaction to this is very negative.  It's like Intel's McAfee deal, but more of an overpayment, and for a company that has no net income and that I believe never has.  It has a whiff of desperation to it, especially since Skype already has services on both iPhone and Android, or so I'm told.  $8.5 billion is a lot of cheese for this company, and I'm not sure what the integration story is.  I too would rather they had returned the $8.5 billion to shareholders.  I do not see how this ever, ever generates more than $8.5 billion in value to shareholders, which is the only test that matters.  I'm speculating they will bundle Skype with Windows 8 and they will bundle it with Windows Phone.  The only way I see this being transformational in any way is if there is some way you could buy a Nokia Windows Phone and not have to pay for cell service separately, i.e., no relationship at all with a Verizon or an AT&T.  If there were a way to do that and still have great service then I think it would be a bit more interesting.

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#3) On May 10, 2011 at 11:39 AM, EnigmaDude (62.41) wrote:

Its like the LinkedIn IPO.  I call it the "Facebook Syndrome" (not quite the same as Zachary Syndrome, but close).  All these popular - and mostly free Internet sites think they can go public, or sell themselves to a public company and make a killing just by doing so, but after the initial fanfare things are likely to get ugly.  The only ones who are gonna profit are the founders of Skype and LinkedIn.

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#4) On May 10, 2011 at 11:49 AM, Momentum21 (96.53) wrote:

If they can communicate the vision in the coming months the street will embrace it...similar to the AT&T acquistion.

Obviously returning the cash by way of dividends is not moving the needle. Like AT&T the cost won't matter if they execute the strategy. They have to make an aggressive move to keep up with Google and AAPL.

I am not saying execution will be easy by any means. I like the upside vs risk in the PPS though.  

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#5) On May 10, 2011 at 11:58 AM, ikkyu2 (98.18) wrote:

Your identity and the people you make calls to are being tracked and sold.  Skype is generating revenue that way.

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#6) On May 10, 2011 at 12:02 PM, ikkyu2 (98.18) wrote:

That said, I find it hard to believe that for 8.5 billion MSFT couldn't have just built a competing service, marketed it, and had plenty of the 8.5 billion left over.  Except that it tried that stunt with the Zune, and the Kin, and now that tablet, and they're not able to execute on that type of project.  A)bort, R)etry, F)ail - not just an error dialog, now it's a business plan!

If I were the CEO, I guess that around November of last year I'd've sold about 1.3 billion dollars worth of stock to express my pessisism.  That'd be me, Steve Ballmer, making a $1.3 billion bet that MSFT would underperform the market.

But hey - this is Microsoft.  That could never happen. 

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#7) On May 10, 2011 at 2:28 PM, vtBrunson (27.51) wrote:

I'd agree they overpaid...

I almost get the sense that they werent expecting the Kinect to be a success, cause there is a serious drought of content for that "platform", maybe the Skype Acquisition will help push Kinect and XBox 360 units and move it from a "interesting but cumbersome technology" to something actually useful.

I read an article in 2009 that says that skype had some 521 million users (can't verify it's accuracy). If they can somehow capitalize on those individuals (i.e. get them to buy an Xbox 360, Kinect, and Xbox live subscriptions) they might be onto something.  

In the future, I can see them providing another "tier" of online capabilities (above Xbox Live "gold") where you have unlimited Netflix, Hulu, Skype, Zune, etc.) capabilities and charging more (i.e. $20+/month)

If they could provide a simple/cheap and easy to use alternative (to Xbox 360,Kinect,Xbox Live) for "non-sophisticated uses (like my parents) and market it as something other than a "game machine" then they might be able to move closer to Bill's dream of "one machine in every living room" (And reap the benefits of recurring revenue) 


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#8) On May 10, 2011 at 9:32 PM, Valyooo (33.59) wrote:

Notice the stock was down on this news....nobody likes the deal.  MSFT is dead money IMO.  However, I am really no expert in this field.  This is strictly from a stock perspective.

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#9) On May 10, 2011 at 11:05 PM, ChrisGraley (28.49) wrote:

I understand why they bought it and I understand the potential synergy, but combining a company that has never made money with a company that likes to overcharge on everything and I just don't see a fit.

Add the fact that they paid twice what it's worth and the are playing catch-up with a company that isn't just eating there lunch here, but making money by not price gouging the public and I just see doom.

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#10) On May 10, 2011 at 11:52 PM, ajm101 (< 20) wrote:

Microsoft is lousy - technically and culturally - at making software that works with platforms other than Windows.  This was an awful idea.  I'm sure Larry Ellison broke a rib from laughing so hard on a yacht somewhere.

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#11) On May 11, 2011 at 12:02 AM, Speculatormaster (33.49) wrote:

Easy now MSFT can use Skype in any of its products and don't have to buy rights, permits, licenses or worries about sue, because now it have in its posesion one of the most used technologies. Now who have to worries its their peers, because Skype is very popular and in good hands now. This is a really bargain who can make monopolies better than msft, no body of course, oh yes, I remember right now one industry has the skill to better the perfect monopoly msft has in the markets, only the oil industry, can beat msft in that game.

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#12) On May 11, 2011 at 3:14 AM, Valyooo (33.59) wrote:

I agree with Cramer, they should have bought Netflix.

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#13) On May 11, 2011 at 11:51 AM, leohaas (30.10) wrote:

Not a single of the comments so far (about 24 hours later) has convinced me.

This reminds me of Lucent Technologies buying Ascend Communications, with two exceptions: ASND was profitable at the time LU acquired it, Skype right now is not; LU used its inflated stock, MSFT cash. Other than that, the similarities are striking: both are way overpaying for technology they could have (and did attempt to) develop themselves in order to catch up with competitors.

I don't see how any company can win that game. For MSFT in particular: most Skype users are already MSFT customer in some form. They are not significantly increasing their customer base. And wouldn't integrating Skype with Windows run into the same regulatory problems as integrating Internet Exporer did?

So I remain convinced MSFT is a sell right now. I have opened a red thumb on it. I have no intent to follow up this call with real money.

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#14) On May 11, 2011 at 12:09 PM, CluckChicken (< 20) wrote:

I feel they may have overpaid a little for Skype but it is not like 8.5 billion is a lot of my to MSFT, they generate newarly twice that a year.

The key to this is that they bought both a technology and a name that is now basically a verb. As others have pointed out this will tie in well with the Xbox and obviously the phone but what nobody has said is how it can easily tie in with Office and their small/mid size business software. Sure Open Office is nice but MS Office is better and if MS ties in Skype with MS Office the ability to easily make netmeetings just makes that difference between Open and MS so much more in favor of MS.

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#15) On July 21, 2011 at 4:14 PM, Momentum21 (96.53) wrote:

How do you feel after the earnings? Convinced yet? : ) I still like AT&T as well. 

The "value traps" are starting to fly the coup... ; ) 


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#16) On July 26, 2011 at 3:47 PM, leohaas (30.10) wrote:

The earnings did not change my opinion about MSFT buying Skype. Here is what Peter Klein said in the earnings call about this topic:

"In May, we announced our agreement to acquire Skype, which will extend Skype's world-class brand and global reach of its networked platform, while at the same time enhancing Microsoft's existing portfolio of products and services. With Skype, we will increase the accessibility of real-time video and voice communications to both consumers and enterprises, thereby generating new business and revenue opportunities for Microsoft. "

One paragraph about an $8.5B acquisition? So for MSFT this is not a big deal. But if this acquisition should have a MSFT-average Return on Assets (18%), wouldn't Skype need to generate about $1.5B in profit per year? How? I still don't get it.

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