Microsoft Acquires Skype: What Are the Real Benchmarks?

Last month’s announcement of Microsoft’s acquisition of Skype certainly triggered speculation, misplaced blame and other conspiracy theories on the blogosphere. It often sounds like a reporter wants to use Microsoft as the most convenient excuse for a post or article. It’s superficial, to say the least. Until Microsoft completes the acquisition, Skype operates as an independent but fully operational company, complete with warts.

Having participated in the major restructuring of a NASDAQ-listed company (and some subsequent acquisitions) and the acquisition of one of my previous clients by a NASDAQ-listed companies (as well as having supplied due diligence information for acquisitions of some of my previous employers’ customers) I’ve had a chance to walk through these exercises.

This post is simply my perspective on the challenges involved in closing such a deal and the short term benchmarks I am looking for in order to measure the impact of the acquisition.

First, some public facts,

• Last fall Skype announced the appointment of Tony Bates as its new CEO. Tony brings many years of business leadership experience with a major (and disruptive) player in the IP-communications space. He has certainly participated in, or been an observer to, some of Cisco’s acquisitions.
• Skype signed a long term lease for new office space in Palo Alto and moved there last December.
• Skype has been on a hiring spree for the Palo Alto office with respect to product managers and developers/engineers.
• On May 10, 2011 Microsoft and Skype announced that Microsoft would be acquiring Skype for $8.5 billion, acquiring a Luxembourg-based company, using cash that Microsoft has kept in Europe (or at least has not repatriated to the U.S.).
• Microsoft has built up a significant Bay Area presence at its Mountain View campus and is in the same time zone as Redmond.
• Last week the FTC filed a notice of early termination, without comment, effectively announcing there would be no objection on their part to closing of the deal.
• Until the deal closes, Skype CEO Tony Bates is and remains in charge, making the key decisions re ongoing business operations; it’s still an independent company reporting to its current investors. (Microsoft could incur legal liability were they to interfere in Skype’s decisions prior to the close.)

Today has seen a plethora of third party posts about executive changes at Skype. However, in the course of an acquisition by a publicly listed company, Skype’s hands are tied by the securities regulators as to what they can say. The only response has been “As part of a recent internal shift, Skype has made some management changes”. On the other hand my first hint of change came when one executive wrote two weeks ago, in his Skype Mood Message, to the effect that he would not be anywhere near Palo Alto at least until August 1.

We spoke with one [current investor] just now who reiterated what other unnamed investors have said in the press this morning: That the decision was 100% Tony Bates’ call. Until the Microsoft deal closes, he has to run Skype like a stand alone company, and these were all executives he’d been considering firing for performance for some time. The timing had more to do with how long it took to go through the process than anything else, this investor said.

And, he noted, that these were all people on the business side of the house, not the technical side of the house. That indicates he was trying to fix part of the company [that] wasn’t working, rather than a wholesale firing of people who stood to get big payouts.

But I’ve seen all this before at other restructurings and acquisitions. In the course of closing the transaction C-level management figures out – some before the close, some after:

• the resources you need and what is duplication, what needs to be merged
  • what is critical to maintaining Skype as an independent business unit and the internal business relationship with other Microsoft business operations
  • how to maintain a culture that encourages innovation and nurtures employee morale
• what policies need to be brought into line with respect to human resources, financial reporting, IT services. marketing and other corporate infrastructure services
• performance of due diligence on all contracts, agreements and outstanding legal disputes – this is the most challenging aspect as these will always raise issues that need to be resolved before closing – and
• clearing regulatory hurtles. While the U.S. FTC has cleared the transaction, there would have to be some EU regulatory clearance required, given that the actual transaction will occur between a European registered company (Skype LLC) and a European subsidiary of Microsoft.

But overriding through all this is the need to not only continue the Skype business operations but also determine how to put together the team and resources that will grow the business. Of significant importance is ensuring the ongoing business operations – as measured by revenues and expenses – do not impact the initial financial basis for the transaction at the time of close.  When I was involved in a restructuring and an acquisition the final question that had to be answered for any of my proposals was the impact on sustaining and growing the business.

In particular, Microsoft CEO Steve Ballmer will be under tremendous pressure to have success with Skype. After all, there is an $8.5 billion investment – the goal has to be both to recover this amount as profits and to generate shareholder return on the investment. This is achieved by not only continuing and enhancing the current user experiences vertically with upgrades and new services but also leveraging Skype technology through horizontal integration  into Microsoft Office, Lync, and Windows Live offerings. The bottom line is that any decisions during the transition and going forward will have to provide answers to that ultimate goal. And, if Tony Bates is to remain President of the Skype business unit at Microsoft after the close, he is going to have to live with his decisions during the closing period.

My real short term benchmarks will be Skype’s delivery of new and upgraded products over the next few months. Here’s what’s on the line:

• Developing a Skype for Mac 5.x that addresses a plethora of user interface issues, the most important of which is making the user interface consistent with the Skype for Windows 5.x user interface.
  • Skype Journal has an update on the Skype for Mac chat style contest.
• Evolution of Skype for Windows – beta version 5.5 with deeper FaceBook integration announced this morning.
• Launch of Skype for iPad – an iPad-specific version that takes full advantage of the iPad’s display format and iPad 2’s video features – a heavily used Google search keyword is “Skype for iPad” –  demonstrating the demand and expectation is there.
• Upgrades to Skype for iPhone (restoration of the keypad on Skype-to-Skype calls) and Skype for Android.
• Launch of Skype for Windows Mobile 7
• Launch of third party applications and hardware that incorporate SkypeKit
• Skype for Business customer success stories; we simply have not seen any since the Skype Connect launch last fall.
• Actual launch of announced services such as: Go To Meeting integration for collaborative desktop sharing, Skype for TV for Comcast cable customers.

Bottom line: It’s real easy, and naive, to blame Microsoft for recent outages and other Skype service interruptions.  When it comes to the Microsoft acquisition of Skype, we are simply going to have to wait out the process – securities regulations place limits on how much information can be made public. Investors and users have to hope the right business decisions are being made during this period; it’s really a matter of C-level management bringing the appropriate skills and experience to the table. This is a situation where trust in the C-level executives to make the right decisions is paramount. In the interim, Skype remains an independent business operation with its CEO in total charge.

But at least the above benchmarks provide some short term benchmarks that are indicators of how Skype will continue to support and upgrade services to its user base. And these benchmarks contribute to passing the ”AmberMac” test.

Update: Shel Israel expresses his perspective in Microsoft Acquires Skype.

Related articles

• Steve Ballmer & Tony Bates Talk About Skype-Microsoft Deal (gigaom.com)