Skyped out

Microsoft/Skype: Microsoft has only recently embraced the Internet cloud. But from shareholders’ perspective, that’s certainly where its $8.5 billion deal to buy Skype belongs. In theory, there are potential advantages. In practice, Microsoft’s poor M&A track record and the high price mean the transaction is unlikely ever to connect for investors.

The idea is that Microsoft can integrate Skype’s voice, video and messaging tools with its Office email and other software and with its mobile operating system. A recent deal with Nokia may help promote Microsoft’s smartphone platform, which is currently an also-ran. Adding Skype, one of the few Internet names other than Google to become a verb, could help — for instance to compete with Apple’s FaceTime video calling. And gaining a Microsoft-like acceptance behind corporate firewalls might extend Skype’s reach.

That all sounds good. But the $6 billion purchase of online advertising group aQuantive in 2007 —- Microsoft boss Steve Ballmer’s largest purchase ever until this one — hasn’t borne any noticeable fruit in the battle with Google. Neither has the software giant’s search deal with Yahoo. Yet the price Ballmer has put on Skype — astoundingly the result of an unsolicited offer, not an auction – would require it to add huge value.

When Skype filed for an initial public offering late last year, a $5 billion price tag looked optimistic. Microsoft’s price is virtually 10 times revenue. Even Google only manages a bit over five times.

Put another way, Ballmer is paying more than 400 times last year’s operating income. Skype, now with 170 million monthly users, is a fast-growing business — monthly users increased 38 per cent last year to 145 million, with paying users up 19 per cent. But to turn that operating income into a 10 per cent annual return on investment, even pre-tax, it has to grow 40-fold.

Microsoft had $50 billion of cash and short-term investments at the end of March, so it can easily afford Skype. But it’s hard to see how the outlay, even from cash held abroad, is going to break even for the company’s shareholders.

Microsoft was the biggest US stock market loser in market capitalization terms late on Tuesday morning, dropping nearly $3 billion. That suggests investors have a different verb in mind than Skype.