Microsoft (MSFT) shares are down 2 cents at $25.65 in early trading following yesterday’s 0.6% decline after the announcement the company will buy Internet calling firm Skype for $8.5 billion.
The day after stories, and the analyst notes seem largely to take a positive tone despite the sticker shock the Street experienced yesterday.
The Wall Street Journal’s Nick Wingfield writes this morning that Microsoft’s deal is a sign of the consumerization of technology, and makes passing reference to Cisco Systems’s (CSCO) failed effort with Flip video cameras. And Wingfield ends with a quote from Meg Whitman, who bought Skype when she was head of eBay (EBAY) in 2005. “Is Skype worth $8.5 billion? I don’t know, but it depends on how big the platform grows.” Wingfield notes that eBay will make a profit of about $1.4 billion on the deal.
Steve Lohr writes in The New York Times this morning, “by stitching Skype technology into Microsoft products, used by hundreds of millions of people, the software giant could hasten the mainstream adoption of video communications, especially in businesses.”
DealBook’s Evelyn Rusli writes that Microsoft settled on the $8.5 billion price in mid-April, after CFO Peter Klein travelled to private equity backer Silver Lake’s offices and the parties involved had discussions about valuation for several weeks.
A Reuters’s Breaking Views column by Richard Beales and Agnes Crane write this morning that, “the transaction is unlikely to pay off.” They note that past deals have floundered: the $6 billion purchase of aQuantive in 2007, “hasn’t borne any noticeable fruit in the battle with Google. Neither has the software giant’s search deal with Yahoo.”
Ann Winblad, a venture capitalist with Hummer Winblad, was on Bloomberg television last night, saying, “It’s the kind of bold move microsoft should be making … I think it’s a brilliant strategic move for Microsoft. It’s a chess move they need to remain competitive with Apple and Google, and it gives them an opportunity to partner further with Facebook, one of their core partners.”
And Bloomberg’s Dina Bass, Douglas MacMillan, and Joseph Galante this morning write that Skype refused to settle for less than $7 billion in its talks with Microsoft, citing anonymous sources.
The Financial Times’s Lex column writes that it’s all about Nokia: “If voice and video over the internet is going to become a big presence in mobile, it makes sense for Microsoft, desperate to differentiate its mobile operating system from Apple’s and Google’s, to buy the dominant brand. Will the network operators play along?”
And what of the analysts?
Walter Pritchard with Citigroup reiterates a Buy rating on Microsoft and a $35 price target. The deal “makes sense,” he thinks, and he lays out some possible “leverage”: the Kinect line becomes the “killer home video conference system / Win phone”; the business division, where it can integrate with Microsoft’s “Lync.” “Some of these integrations could potentially drive meaningful competitive advantage and augment existing Skype revenue that today is almost all based on calls to landline and mobile phones.”
Tavis McCourt with Morgan Keegan sees benefit to Nokia (NOK), Polycom (PLCM), Logitech (LOGI) and Plantronics (PLT) as “video and voice services will require more headsets and video bridging hardware. Nokia may benefit if Microsoft builds in any unique features not available on other handsets.” McCourt thinks Microsoft’s negotiations with telcos will become tougher as they view Skype as a threat, but, “Ultimately, we believe carriers will lose this battle.”
On that score, Craig Moffett with Sanford Bernstein this morning observes that Skype threatens the most valuable portion of the telco economy: basic connectivity. Voice service produces about $1 per megabyte in wireless services, whereas data service — Web browsing, etc. — commands only about 5 cents per megabyte. Undercutting that rich voice goldmine is an “arbitrage opportunity,” he writes, and tech companies love arbitrage. “Perhaps it was the threat of Facebook acquiring Skype that moved Microsoft to pay 10 times revenues,” writes Moffett. “Just don’t expect the carriers to be amused.”
Adam Holt with Morgan Stanley notes that while Microsoft has been developing unified communications with Lync and Xbox Live and Win Phone 7, Skype has 13 patents and over 400 patents pending “in areas from video delivery to data compression.” Moreover, though the valuation is rich, Skype’s metrics have been improving, the company is gaining more importance in social networking, and anyway, there are a lot more M&A deals being done in the $6 billion to $8 billion range, so what could Microsoft do? Use of foreign cash, he notes, is “found money.”
Article courtesy of Tech Trader Daily
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Microsoft 
Microsoft is close to a deal with Skype to buy the internet phone company for $7 – $8 billion, according to the