OK, now I have your attention with a headline different from the “Skype sold for $2.75 billion” headlines so rampant in the blogosphere yesterday….
By now the web has been saturated with stories about yesterday’s announcement of the forthcoming acquisition of a 65% controlling interest in Skype by a consortium of investors, led by SilverLake Management LLC and including a $300MM infusion from the Canada Pension Plan Investment Board. At this point the main story is “old” news but a few comments:
Who is Canada Pension Plan Investment Board?
Since 1965 every employed Canadian contributes a % of their employment income (up to an annual income cap of about $37,000) to the Canada Pension Plan (“CPP”). Between the age of 60 and 65 qualifying Canadians can elect to receive a (taxable) monthly payment from this plan until death along with a “death benefit” to the deceased’s estate. The Canada Pension Plan Investment Board …
… is a professional investment management organization based in Toronto. Our purpose is to invest the assets of the Canada Pension Plan in a way that maximizes returns without undue risk of loss. The CPP Fund is $116.6 billion. Canada’s Chief Actuary estimates that CPP contributions will exceed annual benefits paid through to the end of 2019. Thereafter a portion of the CPP Fund’s investment income would be needed to help pay CPP benefits.
Over 17 million Canadians currently participate in the Canada Pension Plan either as contributors or recipients. So we each effectively have a $16.75 investment in Skype.
And Canada, with its own geographical challenge of servicing a market where 90% of the population lives within 160 km (100 miles) of the 6,000 km (4,000 mile) long Canada-US border, continues its long history of having an interest in communications innovation.
Why was there no Skype-eBay synergy?
Meg Whitman made the same mistake I witnessed at a previous employer where the CEO and Board bought up companies but never got “buy-in” within the acquiring company of any major acquisition that required a rethinking of the overall company business focus and execution.
As a result there were no internal champions within eBay for executing on the stated intentions of the Skype acquisition. And the statements of the day demonstrated that eBay senior executives (and Board) did not understand a basic principle of auctions – there is no role for “conversational negotiations” during an auction; this is critical to maintaining the integrity of the auction process. You see the goods and make a decision as to whether or not you want them badly enough to pay the final auction price; the auction process itself is the “negotiation” of a price. Bidders have no opportunity (and do not want) to communicate with sellers; the auctioneer (in this case eBay) is simply a neutral third party who moderates the transaction to establish a price.
Why is eBay still an investor?
Back in the spring when a potential IPO was announced, we learned that eBay expected to continue to have a minority interest in Skype. With a $1.9 million cash infusion and a remaining 35% interest, eBay can still hope to recover, over time, the approximately $3+ billion it has to date spent on the Skype investment four years ago. At the same time it allows eBay executives to focus totally on getting their struggling “markets” business back into a growth mode.
With this strategy eBay can assuage Om’s concerns in Skype Sale Nears: Why eBay Shareholders Should Be Mad. As a sequel, once the sale was confirmed, Om states:
So Donahue gets to say that he got the higher valuation of Skype, got rid of a potential legal nightmare and can get any upside that comes with the initial public offering of the stock. Seems like a win-win, but that IPO — don’t count on it. To be honest, this deal makes much more sense compared to all the rumors that were floating around earlier. [My italics]
What are the positives about the acquisition?
#1 – Keeping the current executive management team. In his eighteen months as President of Skype, Josh Silverman has brought a lot of business process and experience into the company with the result that business processes and programs are being built to build sustainable and increasing revenue streams. Two recent examples of this are the availability of the FREETALK Everyman headset designed to improve the user calling experience at a very low cost and yesterday’s launch of Skype for Asterisk. Expect much more activity and announcements along these lines of building a stronger Skype ecosystem during the fall. This momentum can only be sustained with a continuation of the current executive team. Skype needs to focus on execution at this point; it does not need any further high level restructuring activity to distract from execution.
Two statements confirm this is the case:
- Josh’s own post, A new chapter, concludes describing “a new group of owners who believe passionately in our mission and in the ability of our team to deliver on it”.
- Egon Durban, Managing Director at SilverLake, states: “Josh Silverman has done a strong job leading the company and we look forward to working with Josh and his team to grow the Skype franchise.”
While there are some “technology heavyweights” becoming involved as investors, the real challenge is to build an effective and synergistic relationship between those “heavyweights” (who will probably become board members and/or advisors) and the current management team. This is where corporate culture and value sets, as established at the executive level, can play a strong role in leaving individual managers the freedom to execute on their goals most effectively.
What are the gotcha’s?
- Resolution of the patent dispute with JoltID. No deal would have been done without some understanding of the part of the new investors of the outstanding issues and prospects for how this issue can be resolved. On the other hand, with the experience of the various new investors, many heads can be brought into the negotiation of a resolution. My take: this will never reach the High Court trial scheduled for next spring.
- Why the $125 million note? My guess: it’s escrow funds to cover costs arising with any litigation issues that may arise in closing the deal. Is a first guestimate of a settlement with JoltiID in the range of $100MM? Can Skype develop a replacement for JoltID’s infrastructure technology so critical to Skype’s business model for under $125MM? Again from Om:
If you think about it, what Donahoe just did was follow the golden rule of business: If you’ve got a problem, make it someone else’s problem. And the problem for the new buyers is that the legal issues of Skype are not going away. Some of my smart friends think that Skype can sidestep these problems by switching to a SIP-based infrastructure, but I won’t hold my breath.
Any SIP-based infrastructure would sharply increase the need for building a massive global infrastructure. It would also mean working with partners (that make Skype devices) to re-configure their products and getting 400 million-plus users to switch to a massive new model. In other words — like skating in the middle of a semi-frozen lake underneath a brightly shining sun.
- Employee motivation: what will be the stock option opportunities for employees now that Skype has effectively gone private?
- Financial reporting news: by effectively going private, Skype also has no investor reporting obligations. On the other hand if these investors intend to exit via an IPO in a couple of years, they must provide some level of financial reporting. (By being a minority investor, eBay no longer needs to report on its Skype investment any more that it does on its craigslist investment.)
What do Canadians want?
Now that 17 million Canadians have an investment in Skype can we expect to get;
- Skype Online numbers? Canada’s 911 regulations provide a roadblock. (Note to CRTC – when lightning struck my home’s Rogers and Bell communications lines two weeks ago, for four days Skype was my only landline service.)
- Skype for iPhone? Requires resolution of a G729 codec patent issue. (Sorry folks, it’s not a Rogers issue.)
- Skype for BlackBerry? Given that Research in Motion has become Canada’s leading technology company.
Bottom Line: With this acquisition Skype is finally free of what Andy Abramson describes as “an extremely conservative, bank-like culture”. Yes, Andy, “Skype is about the democratization of voice”; I would extend this to say that “Skype is about the democratization of conversations – whether voice, chat and video”. I certainly look forward to innovation and a much stronger Skype ecosystem as a result of this change of ownership.
Other posts of note:
- Omar El Akkad provides a great summary overview in today’s Globe and Mail: EBay hangs up on Skype Strategy.
- Globe and Mail Report on Business: What is Skype and Why is it important?
- Om Malik on GigaOm: Skype Sold for $2.75 Billion
- Andy Abramson at VoIP Watch: (after the announcement) Skype Sold, JoltID Suit Still Remains In Place As of Now; (adding to speculation prior to the announcement) Is Skype in Play?
- Update Sept. 4: Dan York, on returning from IT Expo adds his comments in Onward the disruption – Skype’s sale to private investors is a great step; includes Phil Wolff’s Skype Journal graphic showing the ownership post-acquisition based on Om’s reported numbers.
And previous Voice On The Web Posts;
- The Skype IPO: “It Ain’t Over ‘til It’s Over”
- Skype – eBay: Passive Separation
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- Skype sold: it’s all about risk mitigation. (saunderslog.com)
- EBay’s Statement Announcing Skype Deal (blogs.wsj.com)
- The Skype sale: Hot Buzz and No Response (skypejournal.com)
- Skype – eBay: Passive Separation (voiceontheweb.biz)
- Stealthing Skype into Larger Businesses (voiceontheweb.biz)