Big news today in the tech sector.
Microsoft announced an $8.5 billion acquisition of the Internet telephone service Skype Technologies SA from eBay and a group of private equity investors including Silicon Valley heavyweights Silver Lake Partners. The deal is Microsoft's largest cash purchase in its 36-year long history.
"The combination will extend Skype's world-class brand and the reach of its networked platform, while enhancing Microsoft's existing portfolio of real-time communications products and services," according to Microsoft's press release on the deal. "With 170 million connected users and over 207 billion minutes of voice and video conversations in 2010, Skype has been a pioneer in creating rich, meaningful connections among friends, families and business colleagues globally."
But, the big kicker as The Daily Ticker's Aaron Task and Daniel Gross discuss in the accompanying video is the fact that Skype makes no money. In 2010, Skype had revenues of $860 million and posted a net loss of roughly $7 million.
Why would Microsoft dole out nearly $10 billion -- or ten times revenues -- for a company that makes zero profit?
Because the company has a terrible predicament not uncommon to very mature tech companies, according to both Dan and Aaron. Microsoft simply has so much cash it doesn't know what to do with and, for whatever reasons, paying bigger dividends and buying back stock are just not options.
Microsoft may also hope the deal will increase its competitiveness against both Apple and Google in the mobile platform arena by allowing it to upgrade its suite of products.