How being public eases acquisitions

By Felix Salmon
May 10, 2011
acquisition of Skype by Microsoft comes just in time for the Capitalyze conference in San Francisco, which I'm sure will be talking about this:

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The acquisition of Skype by Microsoft comes just in time for the Capitalyze conference in San Francisco, which I’m sure will be talking about this:

The biggest winner of this deal could actually be Facebook. The Palo Alto-based social networking giant had little or no chance of buying Skype. Had it been public, it would have been a different story. With Microsoft, it gets the best of both worlds — it gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google.

If Om’s right about this, then Facebook is just plain lucky that deep-pocketed Microsoft came along to keep Skype out of Google’s hands. If Facebook were public, on the other hand, then it could have just snapped Skype up itself.

I’ve already said that Facebook will go public — but for boring technical reasons, rather than for big strategic reasons like this. And so the question arises: is Om right? Does being public give companies the ability to make large strategic acquisitions, which are impossible so long as they’re private?

This particular case, like so many other cases where Facebook is involved, is exceptional. Skype’s owners, including Silver Lake Partners and Andreessen Horowitz, might well have been quite well disposed towards a deal where they sold Skype to Facebook and got a large yet illiquid chunk of Facebook in exchange. But I’m not sure if that’s even possible, the way that those funds are set up in Silicon Valley: while Silver Lake and Andreessen Horowitz are indeed investing in the likes of Facebook, they’re investing their new funds in those companies, rather than the old funds which invested in companies like Skype and are now reaching maturity.

In any event Om’s point is a good one: if a private company wants to make a big acquisition, that’s a lot easier if your stock is public than if it’s private.

Staying private, then is something which companies might like to do for much longer than they did in the past. But if you’re extremely ambitious and want to grow through the acquisition of large companies, then you pretty much need to be public. Look at Glencore: it desperately wants to buy Xstrata, and the only way it can see of doing that is by going public first.

I’m not entirely clear on why this should be. After all, private-equity companies make enormous acquisitions all the time, and they’re not public. (At least the funds making the acquisitions aren’t public.) It makes for an interesting intellectual exercise to wonder whether Facebook could borrow $7 billion or so to buy Skype, if it were so inclined. But of course it isn’t so inclined: that kind of leveraged buyout makes no sense in Silicon Valley, and Skype would be crushed under such a debt burden. The only remotely sensible way to borrow the money would be if it were a bridge to an IPO, and then at that point you might as well just IPO first.

But the lesson of Skype is that you never know when a big strategic opportunity might arise. And when it does, there will be some part of you wishing that you were public, if only for the option value it confers.

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8 comments so far

I’m not convinced Google really wanted Skype. They have the same (I think better) service in Google Voice, and while they don’t have the user base, they certainly have the capability to build one, and at a much lower cost than $7 or $8 billion. If there is any truth to the rumor they were bidding for Skype, it was probably to drive up the cost for MS.

There is little reason for FB to need to buy Skype, they already have 500 million or more users who use their site to communicate with each other. Adding VoIP functionality shouldn’t cost them $7B either, but you’re right about needing to be public if you want to grow by acquisition, rather than by profits. And speaking of profits, just how much profits does a company like Skype generate? Is it even one per cent of $7B?

It’s gotta be fun to be able to play with other people’s money.

Posted by KenG_CA | Report as abusive

Microsoft’s four possible reasons for purchasing Skype:

1. Microsoft just wanted to spoil Google’s attempt at a purchase, regardless of its merits to Microsoft’s bottom line (if you hadn’t noticed, Microsoft files a complaint every time Google buys someone or does something — Google Books, ITA, Android, Doubleclick, etc.).

2. “WP7 sales are catastrophic” (according to analysts) and therefore needs to buy into features that it can thus add to its mobile OS to make it more enticing. Nokia probably advised them they needed to improve their feature set in order to compete in 2012.

3. Microsoft wanted to acquire any and all of Skype’s IP so that it could sue Google (if no one had gotten into its way, CPTN Holdings would have resulted in Microsoft owning a quarter of Novell’s IP portfolio).

4. Microsoft saw Google Voice’s integration with Sprint and Android, and was concerned that its own platform was about to turn irrelevant if/when GV was tightly integrated with other cellular providers worldwide. (Prices for minutes are about to drop significantly due to wireless VoIP, and GV is at the front line, driving the paradigm shift.)

Posted by GRRR | Report as abusive

Interactive and Visual – Relationship Knowledge Map linking Microsoft to Skype. – By MarketVisual.

Posted by Tatiag | Report as abusive

“I’m not entirely clear on why this should be. After all, private-equity companies make enormous acquisitions all the time, and they’re not public.”

Yeah, and they pay with cash, not stock.

Posted by Dan_Daoust | Report as abusive

@Dan_Doust, the point about going public is that stock becomes all but fungible with cash — the difference is much smaller than it is with private companies.

How did Skype suddenly become a hot item? Less than two years ago Ebay couldn’t get rid of it fast enough and there was a void of suitors.
The lesson of Skype is that if something happened two years ago, it might as well have been 200 years ago.

Posted by thispaceforsale | Report as abusive crosoft-skype-meet-mr-softies-deal-team/  ?KEYWORDS=microsoft+skype

“Microsoft tends not to use outside banking advisers for its deals, confident enough in its knowledge of the software industry to negotiate its own terms….”

Lol, what acquisition has Microsoft successfully executed on? Hotmail?

Is this anything other than an $8b tax on a failure to innovate or does the “cash repatriation” theory hold water?

Posted by art_arbitrage | Report as abusive

Having a currency to use in acquisitions is a rationale often used by investment bankers when discussing IPOs with private companies. As you’ve pointed out, it’s not just a sales line.

As for why this deal might make sense for MSFT, check out this blog:

Posted by thoughtbasket | Report as abusive
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