On Tuesday Microsoft announced details of a $8.5 billion acquisition of online communications company Skype, but the move, conjuring up past initiatives, are leaving analysts bracing for the worse.
The software giant is paying nearly double the price the money-losing voice and video company was expecting in its initial public offering. More importantly, Microsoft has squandered acquisitions in the past.
Skype is a large deal at a relatively expensive price that doesn't transform any MSFT business quickly or in a way which improves perception about its ability to compete in a post-PC world, explained Collins Stewart analyst Kevin Buttigieg.
The idea is that Microsoft can integrate Skype's voice, video and messaging tools with Office e-mail and its mobile operating system for smartphones and other devices.
But such a move would require solid execution, which is not something Microsoft is known for, Buttigeg said.
In 2007 Microsoft bought online ad firm aQuantive for $6 billion, representing the biggest acquisition the company ever made under current CEO Steve Ballmer. The move has yet to shrink the gap between Microsoft online products and the industry titan Google.
What the deal does bring to Microsoft is an established base of users and a growing appeal to attract more customers. Monthly Skype users increased 38 percent last year to 145 million, with the number of paying customers up 19 percent.
But at the same time, the company also loss made a net loss of $7 million last year on revenue of $860 million
They paid a headscratcher of a valuation, said Patrick Becker Jr., a principal at Becker Capital Management.
One of my big fears is that by the time they design this into Outlook, Xbox and their phone software it's going to be overtaken by Google and Apple from a capability standpoint, he told Reuters.
Becker said buying a software company should cost more like a multiple of five times revenue, which would imply a valuation closer to $4.3 billion based on the company's 2010 revenue.
It points to them playing follow the leader, which is a very difficult game to play, said Becker.
My disappointment is that I thought this was an area (in which) they had a fair amount of expertise. To go out and spend $8.5 billion makes me wonder about internal execution. They obviously felt they didn't have the product in house to compete with Skype, Google and Apple.