Microsoft&Skype v5
Transcript of Microsoft&Skype v5
Outline
General Information
Motivations towards the acquisition
Pros and Cons
Values behind the deal
Valuation
Internal and external impact
Benefits for Microsoft2
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Microsoft
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The company was founded by Bill Gates and Paul Allen on April 4,
1975.
The world's largest software maker measured by revenues. It is also one
of the world's most valuable companies.
As for 2010, Microsoft record revenue of $62.48 billion, up 7%
from last year.
Operating income in 2010 was $24.1 billion, up 18% from fiscal 2009 and net income was $18.76 billion, while earnings per share were $2.10, up
30% from 2009, according to a company statement.
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Skype
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Skype was founded in 2003 by two software writers, Niklas Zennström and
Janus Friiswhose.
On 12 September 2005, eBay Inc. agreed to acquire Luxembourg-based
Skype Technologies SA for approximately US$2.5 billion in up-front
cash and eBay stock, plus potential performance-based consideration.
Skype had revenue of $860 million in 2010, which was up 20%, but a net loss
of $7 million.
It had 663 million registered users as of the end of 2010.
On 1 September 2009, it was announced that eBay was selling 70%
of Skype for US$1.9 billion to investment group led by Silver Lake,
valuing Skype at US$2.75 billion.
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Motivations
• In 2010 Skype had filed for an IPO and was going to do about a billion dollars in revenues. So why sell?
• The company had bet heavily on is video sharing service and they failed.
• They were aware of the fact, that they cannot fully use the Skype’s potential, as the Microsoft can.
• The high price offered by Microsoft.
• A boost in the enterprise collaboration market, thanks to Skype’s voice, video and sharing capabilities.
• A working relationship with carriers.
• A lot of potential. Combining Skype's software with the Xbox Kinect and an HD television set.
• The biggest reason to buy Skype is Windows Phone 7 (Mobile OS) and Nokia. They need a competitive offering to Google Voice and Apple’s Facetime.
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Pros and Cons behind the acquisition
PROS
• Boosting Microsoft’s products
• Keeping away competitors
• Skype brand name • Brand-buzz
CONS
• Valuation• Marginal possible
earnings• Similar functionalities
already reached
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$2.5Billion
$2.75Billion
$8.5Billion
SEPTEMBER 2005 SEPTEMBER 2009 SEPTEMBER 2011
--- +10% +309%7
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Skype ValuationRevenue and EBIT
`06 `07 `08 `09 `10Net Revenues 193.696 381.551 551.364 718.903 859.815 Revenue Growth Rate
97% 45% 30% 20%
EBIT -143.119 -1.433.981 22.862 -364.619 20.649 EBIT margin -74% -376% 4% -51% 2%
Y1 Y2 Y3 Y4 Y5 Net Revenues 1.031.778 1.238.134 1.485.760 1.782.912 2.139.495 Revenue Growth Rate
20% 20% 20% 20% 20%
EBIT 53.254 98.076 158.695 239.640 346.615 EBIT margin 5% 8% 11% 13% 16%
Y6 Y7 Y8 Y9 Y10 Terminal ValueNet Revenues 2.507.488 2.868.566 3.201.320 3.483.036 3.692.018 3.913.539 Revenue Growth Rate
17% 14% 12% 9% 6% 6%
EBIT 475.435 623.066 783.693 948.784 1.107.605 1.174.062 EBIT margin 19% 22% 24% 27% 30% 30%Assumptions:
Net Revenue Growth Y1-Y5: 20%, then linear decline to 6% (Industry Average)EBIT Margin: linear incline to Target Margin 30%
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*Monetary Values in Thousand USD
FCFF
Assumptions: Reinvestment Rate 47% (Average Sales to Capital Ratio in Software Industry: 2.14)
`06 `07 `08 `09 `10
EBIT (1-t) 18.061 -288.049 16.313
Depreciation, Amortization 75.534 79.049 161.297
ΔNet Working Capital 43.632
ΔNet Working Capital (approx.) -26.442 116.140 -199.712
Capital Spending 1.952 -3.035 7.198 23.285
FCFF -19.510 -16.486 110.693
Y1 Y2 Y3 Y4 Y5
EBIT (1-t) 42.071 77.480 125.369 189.316 273.826
Reinvestment 80.823 96.987 116.385 139.661 167.594
FCFF -38.752 -19.507 8.985 49.654 106.232
Y6 Y7 Y8 Y9 Y10 Terminal Value
EBIT (1-t) 375.594 492.222 619.118 749.540 875.008 927.509
Reinvestment 172.957 169.707 156.394 132.407 98.222 104.115
FCFF 202.637 322.515 462.723 617.133 776.787 823.394
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*Monetary Values in Thousand USD
CAPM / Cost of Equity
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CAPM = ke = Rf + β(Rm – Rf) + FSP= 0,0319 + 1,1 x 0,1 + 0,006
>> Cost of Equity = 14,79 %
10yr treasury bond rate as of 05/11/11
ß Computer Software:
0.98ß Telecom.
Services: 1.15
Assumed Risk Premium:
10%
Firm Size Premium for Market Value $2.6 – 5.25 bn
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*Monetary Values in Thousand USD
WACC
WACC = ke x + i(1-t) x E DE+D E+D
Cost of Equity:14,79%
Equity:2.246.690
Debt: 686.348
Assumed Interest Rate:
4%
Marginal Corporate Tax Rate Luxembourg:
21%
>> WACC = 12,07 % 12
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SKYPE Valuation (PV) Y1 Y2 Y3 Y4 Y5
WACC 12% 12% 12% 12% 12%
Y6 Y7 Y8 Y9 Y10 Terminal
Value
WACC 11% 10% 9% 8% 7% 7%
Assumption: WACC: Y1-Y5: 12%, then linear decline to 7,2% (WACC Software Industry 7,15%, Telecom. Services 7,05%, Entertainment 9,09%)
• Terminal Cash Flow 823.384• Terminal WACC 0,072• Terminal Value 20.533.514
• PV (Terminal Value) 7.575.712• PV (FCFF over 10yrs) 1.029.046
$8.604.75813
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*Monetary Values in Thousand USD
Internal Impact• Microsoft Live Messenger phased out
• Microsoft Lync to be synchronized with Skype
• Additional funding for Skype• More aggressive development of software• Upgrade of infrastructure • Introduction of new version of Skype to Linux
• Skype pre-installed on Microsoft Windows 8
• Introduction of Ads to Skype 14
Live Messenger phased out
Skype and Lync integration will begin in
June 2013
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External Impact• Increasing competition for classic Telecoms
• Prevention of Skype acquisition by other entities (mainly Google)
• Skype has become an advertising platformthanks to „Conversation Ads”
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An example of a „Conversation Ad”
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Benefits for Microsoft• Acquisition of a strong brand
• Access to large large base of Skype users (600+ M) with over 55 millions Concurrent Users Online
• Possibility to enhance other products (Windows Phone, Outlook, Lync, Xbox)
• Extension of Microsoft’s reach across other platforms (i.e. TV sets)
• Possibility to make money 16
Skype’s Concurrent Users Online 2003-2013
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References• http://www.forbes.com/sites/tomiogeron/2011/05/10/microsofts-acquisition-of-skype-internet-and-mobile-plays/ • http://about.skype.com/press/2011/05/microsoft_to_acquire_skype.html • http://www.microsoft.com/en-us/news/press/2011/may11/05-10CorpNewsPR.aspx• http://phys.org/news/2011-10-eu-microsoft-skype-takeover.html• http://www.bbc.co.uk/news/business-13343600• http://www.microsoft.com/investor/reports/ar10/10k_fr_dis.html• http://www.techwell.com/2013/01/microsoft-goes-all-skype• http://www.guardian.co.uk/technology/2011/may/16/ballmer-microsoft-skype• http://aswathdamodaran.blogspot.com/2011/05/is-skype-worth-85-billion-exercise-in.html• http://www.businessinsider.com/numbers-microsoft-skype-deal-2011-5• http://www.forbes.com/sites/chuckjones/2013/02/06/sp-500-revenue-and-eps-estimates-ratchet-down-after-janu
ary-results/• http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.html.htm• http://techcrunch.com/2011/03/07/skype-revenue-up-20-percent-to-860m-in-2010-paid-users-up-19-percent/• http://techcrunch.com/2011/05/09/microsoft-skype/• UNITED STATES SECURITIES AND EXCHANGE COMMISSION. AMENDMENT NO. 2 TO FORM S-1
REGISTRATION STATEMENT. Skype S.à r.l. As filed with the Securities and Exchange Commission on March 4, 2011.
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