MSFT

[rjstc]

   Shalabs had a link a while back from Bloomberg where there was some discussion of  the "Deadly D" where part of the US tax code on US Corps can help reduce taxes on foreign acquisitions with money overseas. What would the tax implications have been on $8.5 billion brought back into this country to pay extra dividends? Does this look like maybe from the investors standpoint that your cost in effect at this point is less for something that has some potential at least. If one of their potential opponent/ bidders had to pay that $4.? would that have been after tax which would mean obviously 1/3 higher or so pretax?

 

  Also, how much does this turn out costing per subscriber even assuming 15-20% are not even using it that much so you can't count them as active compared to what they would have had to pay for obtaining new ones including the cost of building the new infrastructure? Just curious what peoples thoughts are.

 

 

[goldfinger]

Office, Lync, CE, cloud etc. span different spectrums from the enterprise to the consumer. Microsoft's greatest strength is in the business space. Skype has mindshare in the consumer space.

 

If you mix cost cutting and convert a consumer technology to corporate technology, you run risks of killing the company you just bought.

 

Good points!

1. While margins and moats are in the enterprise businesses it is still interesting to go after consumers which they do across the board. That's how they started. It allows to gain traction and use and to disturb competition.

2. The same technology can be shaped in different ways to fit enterprise needs and consumer needs. I wouldn't be surprised if they also add APIs to allow developers to integrate skype services into their own software.

[ERICOPOLY]

Regarding this discussion on Bing vs Google.

 

I was an Altavista user originally.  It was a painfully long name to type.  Then I moved over to Google.  It gets the job done.

 

Because of this thread, I've been giving Bing a shot today.

 

Honestly, I like it.  It actually feels faster than Google -- especially the map feature.

 

Maybe it's bias.  I can't say.  I do prefer typing "Bing" vs "Google".  The latter takes 75% more keystrokes.

 

But if Google's website goes down, I can move to Bing without missing a beat IMO.

 

[biaggio]

http://www.businessinsider.com/whitney-tilson-presentation-2011-5#-1

 

Whitney Tilson likes MSFT for whatever that is worth. Presentation shows impressive dominance that MSFT still has. Outside my tiny circle of competence but enjoy reading this thread. Thanks.

[Liberty]

Maybe it's bias.  I can't say.  I do prefer typing "Bing" vs "Google".  The latter takes 75% more keystrokes.

 

But if Google's website goes down, I can move to Bing without missing a beat IMO.

 

I would question why you even type the name of your main search engine. You can set it as your browser's 'home', so that pressing the home button brings you there. You can put a bookmark in the bookmark bar that is always visible.. Most modern browsers have a search field or a URL address bar that can be used as a search engine field (you set it in the preferences), or they auto-complete URL (so that you just type G and maybe O and it'll suggest "www.google.com").

 

Personally, I have my Chrome set up so that I can search from any search engine from the address bar with one prefix letter; so "g something" is google search for "something", "a something" is on Amazon.com, "i something" is on IMDB.com, "b something" is bing, etc.

[ERICOPOLY]

Maybe it's bias.  I can't say.  I do prefer typing "Bing" vs "Google".  The latter takes 75% more keystrokes.

 

But if Google's website goes down, I can move to Bing without missing a beat IMO.

 

I would question why you even type the name of your main search engine. You can set it as your browser's 'home', so that pressing the home button brings you there. You can put a bookmark in the bookmark bar that is always visible.. Most modern browsers have a search field or a URL address bar that can be used as a search engine field (you set it in the preferences), or they auto-complete URL (so that you just type G and maybe O and it'll suggest "www.google.com").

 

Personally, I have my Chrome set up so that I can search from any search engine from the address bar with one prefix letter; so "g something" is google search for "something", "a something" is on Amazon.com, "i something" is on IMDB.com, "b something" is bing, etc.

 

You should question many of the things I do.  Really though, I just go to the address bar.

 

Historically I've been an IE user (except when using a Mac).  You just press "Tab" after a page loads and then you're in the address bar.  And the Yahoo! and Google toolbars destabiized the browser process -- not sure if they've fixed those issues, but it was enough to keep them off my system.  It's been at least 4 or 5 years now since I last tried those search toolbars in IE.

[Santayana]

You should question many of the things I do.  

 

That is a great quote!  I think it's going to become my new sig line. ;D

[Guest VAL9000]

  Also, how much does this turn out costing per subscriber even assuming 15-20% are not even using it that much so you can't count them as active compared to what they would have had to pay for obtaining new ones including the cost of building the new infrastructure? Just curious what peoples thoughts are.

 

rjstc, you should math it up and post your thinking so we can tell you what we think.  At least, that's what I've been doing and the results have been great.

 

I'll give you a hint on the infrastructure cost - it's approaching zero on a per user basis.  I can't validate this with numbers, but knowing about how the architecture works and the scale of users involved... it doesn't take too much investment from MSFT to run this huge network.  I fail to comprehend how they had 1000 people on the team, though.

 

[shalab]

Looks like Skype has ( or plans to have ) > 1000 employees

 

http://www.businessinsider.com/you-could-work-here-tour-skypes-beautiful-new-offices-2011-2?op=1

 

 

[shalab]

MSFT record with acquisitions:

 

http://www.businessinsider.com/microsofts-15-biggest-acquisitions-and-what-happened-to-them-2011-3?op=1#ixzz1LyNOSqAa

 

Microsoft employee reaction - seems pretty negative:

 

 

http://minimsft.blogspot.com/

 

[rjstc]

  Val; Thanks for your thoughts. I'm not the greatest with numbers. Would need a CPA or someone smart in this area. This generally was what I was suggesting might be some of MSFTs rational. Rather then just reacting negatively about the purchase price and the fact that Ballmer is an airhead I was trying to ask what some other dynamics might be behind all of this. Most everyone (not just on these boards) seem to be gagging over the price. It does seem high but maybe this makes it seem a little more palatable. Of course in the long run only time will tell. It may turn out to be a stupid purchase or maybe not. But even if they end up writing off the whole deal it doesn't seem to me that it kills Microsoft. In fact if it doesn't work maybe they get rid of Ballmer and put someone in who will do a better job. Maybe that would be positive. I have to believe there is a lot of serious private money invested in this company that would start putting a lot of pressure on people if he really screws this up. By the way. I do have a big position in MSFT that I have recently purchased but before this announcement.

  Here is some of what I was trying to ask such as subscriber aquisition costs or possible tax implications and reasons.

 

(1)From Business Insider 5/11/2011.  Big news yesterday was Microsoft's acquisition of Skype for a striking sticker price of $8.5 billion.

Most people stopped at the price, expressing surprise that Microsoft could spend so much money for a company that had recently been spun out at a $2.5 billion valuation.

 

But here are two numbers that explain the logic behind the deal: $14.7 and 50.

 

What do they mean?

 

$14.70 is what Microsoft paid per user for Skype, according to Atomic Inc. When eBay bought Skype back in 2005, they paid $45.60 per user. So Skype's price went up, but its price per user went down. Another way to look at it is that when Microsoft invested in Facebook at a $15 billion valuation, a move then viewed as an act of desperation and now recognized as a masterstroke, the social network had less than 100 million users, which works out to more than $150 per user. Comparatively, Skype is a bargain.

 

116 is the number of days until Microsoft makes the money back in operating cash flow. Microsoft had $26 billion in operating cash flow last year. So $8.5 billion works out to around 116 days of cash flow for Microsoft. That money would have been rotting on the balance sheet anyway. Given the possible synergies between so many of Microsoft's products--Windows Phone 7, Kinect, Lync, etc.--that's cheap. Of course, it's all up to good execution whether those synergies can be accomplished, but even the option on them is worth that kind of money.

 

(2)US stocks rallied on Tuesday, and some folks

 

tried to draw a connection between that rally and Microsoft's acquisition of Skype, based on the whole "Animal Spirits" notion, that big deal activity is generally a bullish sign of confidence.

 

That argument may be flimsy, but there is a fundamental aspect to consider, which is that Microsoft used $8 billion of the $42 billion in cash it holds overseas, as noted by Eric Savitz at Forbes.

 

Cash held overseas by US multinationals is a big deal, as it can't be repatriated or used as dividends without a huge tax being paid.

 

There's been a lot of talk about a tax "holiday" that would allow companies to repatriate cash, but for the most part the Treasury Department has resisted this, instead preferring some sort of comprehensive reform to the system.

 

So the fact of the matter is that if companies start deploying their foreign cash for acquisitions, then at least at some level that's cash being turned from an asset that's just sitting there, into a productive asset for the company.

 

Now, bear in mind, it's not necessarily so simple for companies to just use their foreign cash this way. The only reason Microsoft was able to do this is because Skype is actually headquartered in Luxembourg, as WSJ explains. But surely it's not the only foreign-based company that will look juicy to a US multinational.

 

Suddenly, for all these big, lumbering companies sitting on mounds of cash, investors realize they have one path for deploying it.

 

Read more: http://www.businessinsider.com/microsofts-use-of-foreign-cash-to-buy-skype-2011-5#ixzz1M6s0AWMB

 

 

[cashisking]

Does anyone actually know what tax rate is to be paid when repatriating cash back to US? Its probably complicated (depending on operational details), but is there a convenient range i can use to plug in valuation? What discount do you guys apply?

 

TIA

[rjstc]

Cashisking;  Don't know numbers. Way over my head, but this is a little more info from Business Insider.

 

    It's not often that a post on a government blog could be considered "actionable" for investors, but this is interesting...

 

The Treasury Department has put up a post about the politics and cost of a repatriation tax holiday -- letting companies move a bunch of cash from overseas accounts back to the US without paying a ton of taxes on it.

 

The general tone is negative, that such a tax holiday would be costly, and with little benefit, but Citi's Steve Englander detects some important wiggle room.

 

We sent this trade recommendation out, recognizing that we might be early to this trade, but also feeling that some political momentum was beginning to emerge that favored HIA, either as the Administration prefers, as part of comprehensive corporate tax reform, or as US House of Representatives’ Republican Majority Leader Cantor suggested recently, as an interim measure while broader tax reform was debated. Today's comments on a Treasury blog by Treasury Assistant Secretary Mundaca were viewed by many as a hardening of the Administration line but his conclusion reiterates the Administration's willingness to deal: "The tax treatment of overseas earnings could be considered as a part of broader corporate tax reform, but as Secretary Geithner has said, it would not be sensible to consider a repatriation holiday outside of that context."  As a footnote, the Bush Treasury was no more enthusiastic about HIA-1 in 2004 than the Obama Treasury is about HIA-2 now, and on largely the same grounds. However, it was very attractive to the broad business community, caused direct pain to no one and had considerable Congressional support.

 

If this does happen, the potential impact for investors could be significant. The tech industry has a ton of cash parked overseas that it's just sitting on for lack of good investment opportunities (think: aging giants like Microsoft, Cisco, and Intel). Folks have been clamoring for them to pay more in dividends, noting their huge cash piles, but the tax repatriation issue is an impediment.

 

Take away this barrier, and suddenly a world of dividends, buybacks, and acquisitions opens up.

 

Read more: http://www.businessinsider.com/treasury-blog-post--repatriation-tax-holiday-2011-3#ixzz1M9KOjTAg

 

[Myth465]

Does anyone actually know what tax rate is to be paid when repatriating cash back to US? Its probably complicated (depending on operational details), but is there a convenient range i can use to plug in valuation? What discount do you guys apply?

 

TIA

 

They should have taken the 30% - 40% tax hit and brought the money back and paid a dividend or did a buyback. Better to lose 40% of $8.5 billion, then to piss away the whole thing inmo.

 

Not sure on the rate, but probably the max rate if they bought enough of it back.

 

Unless Steve has something under his sleeve, like getting into Telecom using Skype, I dont know how they will see a full return of the money, or a return on the money.

[tengen]

I hope this isn't a stupid question but is the "price per user" metric generally considered a useful way to look at acquisitions? The last time I remember seeing it used was back in the days of the dotcom bubble. That period traumatized me so much I've stayed away from tech stocks ever since.

[ShahKhezri]

I'm in the minority, I like the acquisition.  If Google or Apple would have made the same acquisition, most would say "that's why they are ahead of Microsoft" 

 

The possibilities/capabilities of Skype within the Microsoft platform are interesting.  They purchased a widely used verb for $8.5B.  Instead of getting into hardware, they teamed up with Nokia.  Google made a bid for Groupon for $6B, word around that Goldman was telling they could IPO at $16B.  Not that I agree with that valuation, but the reality is, MSFT with Skype could destroy CSCO and put a dent in search vs. Google. 

 

Most thought the money they spent on the small piece of Facebook was dumb, but they are 6x up on that investment as of today.  They pretty much took the paper gain on FB and used a chunk on Skype. 

 

Cash earning very little overseas and Skype can be accretive within year one.

 

 

[Guest VAL9000]

They should have taken the 30% - 40% tax hit and brought the money back and paid a dividend or did a buyback. Better to lose 40% of $8.5 billion, then to piss away the whole thing inmo.

 

Unless Steve has something under his sleeve, like getting into Telecom using Skype, I dont know how they will see a full return of the money, or a return on the money.

LOL - a bit dramatic with the pissing? ;)  I think the point here is that even if they overpaid by 40%, they're still "even".  I hadn't factored the tax thing in, and I don't plan to.  The acquisition has merits separate from just using up foreign cash.  And yes, Microsoft is now the biggest telco in the world, depending on your method of measurement.

 

I hope this isn't a stupid question but is the "price per user" metric generally considered a useful way to look at acquisitions? The last time I remember seeing it used was back in the days of the dotcom bubble. That period traumatized me so much I've stayed away from tech stocks ever since.

Nah it's not a stupid question.  The metric is useful because there isn't a more useful metric.  Generally speaking, some metrics are really powerful indicators of intrinsic value, like earnings power or book value, but in many cases these metrics don't apply.  This is especially true with nascent high-tech businesses; most of the value is captured in things like IP (which has a book value of zero, ignoring patents and acquired goodwill) or other intangibles like users, audience, etc.  Users can be a useful comparison because an active user base is the foundation for generating revenue.

 

We can intelligently use these metrics to our advantage.  Or, we can be idiots and repeat the same mistakes from the dotcom era.  Clearly, applying revenue stats from AdWords to Skype is going to result in unrealistic expectations - this is a terrible match.  Indeed, comparing Facebook's valuation to Skype's based on user count is also a weak comparison.  However, applying YouTube revenues and stats to Skype will probably reveal much more about the earning power of this asset.

 

Today, YouTube brings in about $1bn in revenue for Google.  The form of this revenue is primarily in advertising - preroll ads (15-30 seconds before the video starts) and overlay banner ads.  There are other forms of advertisement included in this number which I can't tease out, so we'll say $800mm of that is attributed to these forms of advertisement, both of which are both applicable to Skype (at least the video calls).  So assuming similar click-through rates and advertising interest that Google sees, we can value Skype's earning power from advertising today based on the number of minutes people spend on Skype.  For Google it's something like ($800mm / 365) / 2bn minutes per day = $0.00219 / minute.  About 1/3rd of Skype calls are video calls, so our proxy for Skype's potential revenue there is $0.00219 / minute * 207bn minutes / year * 33% = $151mm / year.  Adding to that the $860mm they make to date on non-ad services and we get to a base revenue potential of about $1bn / year on current usage.

 

I didn't really set out to try to value Skype when I started writing this...  I just wanted to illustrate that valuation from non-dollar metrics can be pretty useful.  Of course, now that I've done all the work, I kinda like the result.  A greater % of calls will be video based, and assuming Microsoft can add context to the user or the call, then we can expect CTRs that are better than what YouTube enjoys (they suck).  The other point worth noting is that Google has to shell out for all of the bandwidth for all of those videos.  Skype, being P2P, does not.  Because of this, Skype has the potential to be significantly more profitable than YouTube.

 

[rjstc]

    MY  MAY 10 message

   As to one possible thought of what to do with this investment. What if You put an ad which shows up when you first log into Skype. How much revenue could be generated with that? The infrastructure is already in place. Anything else could be extra. Newspapers ran losses on operations for years and made money on advertising. Microsoft looks to have overpaid but with this many Skype subscribers it seems possible there are a lot of potential synergys.

 

   Also it's not like they have permanently harmed the company. It's like what 2/3 yearly cash flow which is a one time event. If they gave Skype away for free they still have the cash flow coming in like they did before if they do nothing else. Skype isn't making money yet but it isn't losing hugely either. Many companies have one time events that temporarily hurt profits but are one time events like this. Maybe a dumb waste of money but only time will tell about that. One of those cup half full versus cup half empty situations. 

 

 

.

 

 

 

 

 

I hope this isn't a stupid question but is the "price per user" metric generally considered a useful way to look at acquisitions? The last time I remember seeing it used was back in the days of the dotcom bubble. That period traumatized me so much I've stayed away from tech stocks ever since.

Nah it's not a stupid question.  The metric is useful because there isn't a more useful metric.  Generally speaking, some metrics are really powerful indicators of intrinsic value, like earnings power or book value, but in many cases these metrics don't apply.  This is especially true with nascent high-tech businesses; most of the value is captured in things like IP (which has a book value of zero, ignoring patents and acquired goodwill) or other intangibles like users, audience, etc.  Users can be a useful comparison because an active user base is the foundation for generating revenue.

 

We can intelligently use these metrics to our advantage.  Or, we can be idiots and repeat the same mistakes from the dotcom era.  Clearly, applying revenue stats from AdWords to Skype is going to result in unrealistic expectations - this is a terrible match.  Indeed, comparing Facebook's valuation to Skype's based on user count is also a weak comparison.  However, applying YouTube revenues and stats to Skype will probably reveal much more about the earning power of this asset.

 

Today, YouTube brings in about $1bn in revenue for Google.  The form of this revenue is primarily in advertising - preroll ads (15-30 seconds before the video starts) and overlay banner ads.  There are other forms of advertisement included in this number which I can't tease out, so we'll say $800mm of that is attributed to these forms of advertisement, both of which are both applicable to Skype (at least the video calls).  So assuming similar click-through rates and advertising interest that Google sees, we can value Skype's earning power from advertising today based on the number of minutes people spend on Skype.  For Google it's something like ($800mm / 365) / 2bn minutes per day = $0.00219 / minute.  About 1/3rd of Skype calls are video calls, so our proxy for Skype's potential revenue there is $0.00219 / minute * 207bn minutes / year * 33% = $151mm / year.  Adding to that the $860mm they make to date on non-ad services and we get to a base revenue potential of about $1bn / year on current usage.

 

I didn't really set out to try to value Skype when I started writing this...  I just wanted to illustrate that valuation from non-dollar metrics can be pretty useful.  Of course, now that I've done all the work, I kinda like the result.  A greater % of calls will be video based, and assuming Microsoft can add context to the user or the call, then we can expect CTRs that are better than what YouTube enjoys (they suck).  The other point worth noting is that Google has to shell out for all of the bandwidth for all of those videos.  Skype, being P2P, does not.  Because of this, Skype has the potential to be significantly more profitable than YouTube.

 

VAL thanks for putting some numbers and thoughts on what my question of May 10th was asking also.

[jegenolf]

Cash earning very little overseas and Skype can be accretive within year one.

 

great point. The cost of capital is pretty low here, if only because MSFT is doing its best Scrooge McDuck impression sitting on mountains of expatriated cash.

[Liberty]

I found this pretty negative piece about Ballmer, thought it would interest some people here:

 

http://brooksreview.net/2011/05/ballmer/

 

When comparing to AAPL and GOOG they don't take into account dividends, but the qualitative arguments against Ballmer do right pretty true.. MSFT is doing well, but it could probably do better with a better leader.

[txlaw]

They should have taken the 30% - 40% tax hit and brought the money back and paid a dividend or did a buyback. Better to lose 40% of $8.5 billion, then to piss away the whole thing inmo.

 

Not sure on the rate, but probably the max rate if they bought enough of it back.

 

Unless Steve has something under his sleeve, like getting into Telecom using Skype, I dont know how they will see a full return of the money, or a return on the money.

 

Myth, my thinking on the Skype acquisition is that Ballmer is on the defensive, trying to prevent a situation where the MSFT platform/ecosystem gets almost completely displaced by Google and Apple platforms/ecosystems -- and maybe others, as well -- in both the consumer and business space.

 

So, in this case, we have to think of the counterfactual, which is difficult for most people to do.  That is, if MSFT's ecosystem did not have an over-the-top audio/video conferencing system that was popular with consumers and that could be integrated into its business software, what would be the present value of the profits lost due to not having that feature?  And could they build such a feature in-house in time to prevent catastrophe? 

 

It's a tough question, but I guarantee you that MSFT insiders have been asking themselves that.

 

Remember these purported words from Buffett about MSFT:  "In effect [MSFT] has a royalty on a communication stream that can do nothing but grow."  One of the fundamental questions we should ask ourselves about MSFT is this: what would happen to MSFT profits if its ecosystem market share were to collapse?

 

-------------

 

I found some interesting additional info on the MSFT-Skype deal.

 

Skype recently bought a company called Qik that allows users to record videos on their phone and instantaneously share and sync them with various accounts.

 

See http://qik.com/info/overview ; http://qik.com/qik_features

 

And Skype also has an investment in a company called Rdio, which could be folded into/replace the Zune streaming music service.

 

See http://mediamemo.allthingsd.com/20110510/skype-microsoft-and-the-fate-of-music-start-up-rdio/

 

Finally, a former director of product development and "father of the Estonian Internet" had some interesting things to say about the deal.

 

See http://www.dw-world.de/dw/article/0,,15070167,00.html

 

-------

 

Having said all of the above, you should know that I'm long GOOG! :D

 

 

[DCG]

.

 

But here are two numbers that explain the logic behind the deal: $14.7 and 50.

 

What do they mean?

 

$14.70 is what Microsoft paid per user for Skype, according to Atomic Inc. When eBay bought Skype back in 2005, they paid $45.60 per user. So Skype's price went up, but its price per user went down. Another way to look at it is that when Microsoft invested in Facebook at a $15 billion valuation, a move then viewed as an act of desperation and now recognized as a masterstroke, the social network had less than 100 million users, which works out to more than $150 per user. Comparatively, Skype is a bargain.

 

 

Yeah, but Miscrosoft paid $1,000 per paying Skype user.

[Guest VAL9000]

Yeah, but Miscrosoft paid $1,000 per paying Skype user.

 

By that measure, they really got ripped off when they invested in Facebook...! ;)

 

[DCG]

The real winner in this deal is eBay, which made a $1.4 billion profit on its original investment. They still owned 35% of the Skype.

[Valuebo]

All this chat about their additional segments and whether they might or might not get decent market share and the subsequent earnings that they could add in a far future...

 

IMO : Take "earnings of segments with enough moat (OS, office, servers, .. in businesses)" and even discount all other earnings, subtract losses from all those additional segments and determine if there is enough potential left without this noise and all the "maybe's". If the core can easily outweigh all the diworsification that seems to be going on and if we can consider this core to be strong enough, we could consider this a good investment?

 

That's just my opinion. I don't really want to guess what chance Bing, Skype, Xbox & Kinect and all other possibilities have to ultimately make it. I can only guess...

 

:)