• Steven Kohnke

Why Microsoft Bought Skype


Why Microsoft Bought Skype

How do you identify the natural strategic acquirers for your company?

Microsoft bought Skype for $8.5 Billion in 2011. At the time of the acquisition, Skype was actually losing money. So by using any traditional form of valuation, Skype was really a worthless company, but Microsoft saw it worthwhile to spend $8.5 Billion dollars for Skype.


Why?


Because they were looking at the business not for buying a future stream of profits but for what it was worth in their hands. That is the definition of a strategic acquisition. Looking at what the asset is worth in the hands of the acquirer.

In the case of Microsoft, they have a challenge. the biggest challenge they have as a company is that their customers are slow to adopt their new products. this happens across their entire product line. But let’s look at the Windows product line, the operating system itself.

If you look at the image below, you’ll see that more than half are using Windows 7, 12% of the users in 2015 were still using Microsoft Windows XP. About 7% were using Windows 8 only, 4% are on Vista, and 15% are on other and older versions of windows.



So if you take collectively, everybody who is not on the latest version of Windows, you’ve got a huge market that Microsoft wants to move over to the latest version of Windows. So then when you look at why they might want to acquire a company like Skype, you might start to imagine why that would be. Well if they were to embed Skype naturally and seamlessly into the next version of Windows, and if they were to start monetizing it and convincing all of those Skype users to migrate and adopt to the latest version of Windows, you can start to see that getting even 10 to 20 percent of billions of users to adopt a new application makes sense of why they would go ahead and acquire a company like Skype for such a huge amount of money. This also applies to their other products like Xbox Live and Microsoft Office.

Remember when a strategic buyer buys your company, it is less about your company, and selling more of your services. What they are trying to figure out is how your company will help them sell more of their products or services.



 

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