Venture capitalists upbeat about Microsoft’s massive $8.5 billion buyout of Skype

Microsoft's Steve Ballmer and Skype's Tony Bates

Microsoft has been fairly quiet on the M&A front over the past 18 months, a fact that has not been lost on venture capitalists who love when cash-rich tech titans come knocking on their portfolio companies’ doors.

But Microsoft surged back onto the scene Tuesday with its blockbuster $8.5 billion buy of Skype. Some of the venture capitalists I spoke with were almost gleeful upon hearing the news, calling it a smart and strategic move and expressing hope that it will spark even more aggressive deal making going forward.

Microsoft certainly has plenty of coin in the bank — roughly $50 billion in cash, cash equivalents and short term investments. Seattle venture capitalists said that Microsoft needs to smartly wield that cash as a weapon in its battle against the likes of Facebook, Google and Apple.

I chatted with Greg Gottesman of Madrona Venture Group; Bill Bryant of Draper Fisher Jurvetson; and Bill McAleer of Voyager Capital to get their reaction to the Microsoft-Skype deal, including potential integration challenges and other issues.

“I hope it means that Microsoft is back in the game and is going to start … using its balance sheet as the positive hammer that it can be,” said Gottesman.

Here are additional excerpts from their remarks.

ON WHAT THE DEAL MEANS FOR MICROSOFT:

Bryant

Bill Bryant of DFJ: “I think it is fantastic. When making an acquisition such as this, you look for transformative and disruptive approaches on how to reshape your business and Skype has become a powerhouse. I use it all of the time … and I just think it is a very clever, insightful move for Microsoft. The strategic fit is really interesting because it is going to open up many, many revenue streams for Microsoft and allow them to touch hundreds of millions of people that they maybe don’t today in the communications space.

History has proven that acquisitions — if they work, they work really well … in that they create a lot of synergy with the current business. And, if not, you paid $9 billion or $3 billion and you still overpaid. Skype is a large scale business that touches hundreds of millions of people, and that’s what Microsoft does best. If you think about building out the Windows franchise and Internet Explorer and Office, they do well at scale.”

IS MICROSOFT GETTING MORE AGGRESSIVE IN M&A?

Gottesman

Greg Gottesman of Madrona Venture Group: “Even though revenues and net income and all of those financial measures have increased significantly over time, (Micrososft’s) stock price has remained flat. And I think the reason that the multiple keeps going down for Microsoft is that in some key areas they are not strategically well positioned. So, I think this acquisition, and hopefully more acquisitions like it will position Microsoft in some key areas…. One of Microsoft’s assets is its cash, its balance sheet, and I am glad to see them be a little more aggressive with it and they need to be in order to compete against Apple, Facebook, Google.”

DFJ’s Bryant: “I am very hopeful of that. I know that they made a hire recently to focus on venture portfolios and really identify companies that could be perspective acquisitions. Hopefully, they will begin to spend some of that cash — and not only on the Skypes but on $25 and $50 and $100 million tech acquisitions. There is no question that Microsoft has not kept pace with Facebook and Google and Zynga and others in acquiring, and hopefully this will be the breaking up of the ice jam.”

ON MICROSOFT’S INTEGRATION OF SKYPE:

Madrona’s Gottesman: “I think it is fair to say (Microsoft’s) track record (of M&A) is mixed. But one of the things they will be focused on this time is trying to make sure that they do a good job of integrating this. In this case, depending upon where this asset falls, I think they have some strength in some key areas that they can leverage. What I hope doesn’ t happen is that they make it a feature of some of their other stuff, but they let it continue to blossom on its own in addition to being a part of their key assets. That’s what is going to be key. Sometimes what happens when you subsume it underneath layers of management, that’s where I think it is more difficult to have a positive integration.”

DFJ’s Bryant: “I don’t think that any company — outside of Cisco — has really developed an artful way of integrating acquisitions. And that’s always key. On the surface, acquisitions always pencil out, or you wouldn’t do them. But the integration and the cultural integration ends up being a challenge…. I don’t know enough about Skype’s internal culture and how it operates and how that meshes. But it seems that it has been an entrepreneurial company for years, and if Microsoft can truly let it run as they indicate as a super division, then it has a chance. If it tries to become a part of the Windows division, then it will die.”

DID MICROSOFT OVERPAY FOR SKYPE?

Madrona’s Gottesman: “There’s no question this is a high price…. We are in a little more of frothy market, so the question is: Could they have made some purchases earlier that may have been more strategic and less expensive? Yeah, but hindsight is 20-20. They are where they are at this point. And I am glad to see them being aggressive with an asset like this. My guess is that there was probably some competition for (Skype). I hope they make a couple bets. I hope this is not the only one.”

ON WHAT THE DEAL MEANS FOR THE TECH M&A MARKET

McAleer

Bill McAleer of Voyager Capital: “I think this acquisition is reflective of a broader trend where large technology players with mature business models will need to acquire companies to grow top line revenues and add new and more innovative products to their mix.  We’re seeing this accross the industry with players like Oracle, HP and others. Additionally the larger companies have big cash hordes (one data point indicated that cash had grown 30-40 percent year/year) and they need to see better returns on invested capital. I would expect there will be a lot more activity this quarter and next. We have several of our portfolio companies in strategic discussions so are seeing a pickup in interest in our own investments as well.”

ON THE VENTURE CAPITAL BACKERS OF SKYPE:

Madrona’s Gottesman: “They made an absolute killing.”

ON WHY THE SKYPE DEAL MATTERS TO SEATTLE:

DFJ’s Bryant: “Let’s hope for a benefit to the local economy if this does work out. Skype brings thousands of talented individuals, and we talked about large-scale social media, social networking businesses and we don’t have that here in Seattle. Skype is that. It is (hundreds of millions of people) who are connecting to one each other and who knows where that will lead. I am hopeful that insight and skill set will permeate through the rest of the local economy as those people figure out that they’d rather live in Seattle than the Bay Area.”

Madrona’s Gottesman: “From a VC standpoint, I’d love to see Microsoft get more aggressive. But I am also a Seattleite. And having a strong Microsoft is extremely important for our community. One of the things that I think all of us, including people at Microsoft have been frustrated by, is the perception that they are not strategically relevant. And I think this is a decision is certainly a strong step to say: ‘Hey, we are going to be big players over this next couple of innings.’”

GeekWire Poll: Is Microsoft’s Skype acquisition a smart move?

John Cook is co-founder of GeekWire. Follow on Twitter: @geekwirenews and Facebook.

  • http://twitter.com/chrisamccoy Chris McCoy

    I love this move! Makes Cloud Office more defensible, gives Windows a major product edge for 8, and gets them into the telecommunications game. As Bill said, an integration (assuming there is one) into core products is key. Can they do it? We’ll see. With that said, would much rather have Skype at $8.5B than Yahoo at $44B, so +1 for Steve and his team.

  • Jonah

    None of these questions relate to 25% penalty Microsoft would have to pay to bring cash from overseas to buy of the domestic, VC backed companies. That can be a significant deterrent tomaking a purchase

  • Anonymous

    Good for local startup community, i guess!

  • Bob

    “And I think the reason that the multiple keeps going down for Microsoft is that in some key areas they are not strategically well positioned.”

    Like just about every new area that is important, including search, mobile, tablets, etc.

    Skype was an OK buy except that they paid too much. MS is so far behind now in some many areas that they would have to 10+ deals like this and integrate them all perfectly, which they’re never done, just to have a chance at competing more effectively against Google and Apple.

    Also, when did MS start competing against FB? I thought they were partners.

  • http://twitter.com/kenikh kenikh

    History will tell if Microsoft overpaid, but the fit was natural. Every asset Microsoft has offers touchpoints for Skype: phones, computers, forthcoming tablets, XBOX/Kinect, Lync, Exchange, the list goes on and on. Skype’s customer base alone made them too hard for Microsoft to resist.

    MSFT really was the perfect acquiror: their reach and breadth is of a rare scale that allows for added room to expand Skype’s revenue through these touchpoints. Skype has a huge customer base that has yet to touch all of the above Microsoft products. There is opportunity in Windows, but the non-overlapping customers between Microsoft’s non-Windows products and Skype’s customers offers the most interesting potential for creating new opportunities.

    Another facet worth considering is that this move ties Facebook even more tightly to Microsoft, as the asset Facebook coveted is now owned by one of their biggest strategic partners and investors. Microsoft is just as keen to keep Facebook away from partnering with Google, as Facebook was in trying to get ahead of Google by buying Skype. With this deal, Facebook wins, Microsoft wins. Google…we’ll see.

    Was there a premium paid over existing offers? Likely. That said, whoever purchased Skype was going to pay a premium – with Google and FB inthe mix, the final number wasn’t going to be $4B. I firmly believe that Microsoft, above all others, has the greatest upside for quickly recouping that premium.
    @kenikh:twitter

  • sparkles

    “Venture capitalists upbeat about Microsoft’s massive $8.5 billion buyout of Skype”
    Because they can get big cash on their skype investment?