Posts tagged ‘mobile’

Microsoft Enters Garbage Recycling Business

Microsoft Inc. (MSFT) is going green in more ways than one. Not only is Microsoft shelling out a lot of green ($8.5 billion) to acquire internet communication company Skype, but Microsoft is also going green by recycling Skype – an asset previously tossed away as garbage by eBay Inc. (EBAY). While I’m certain Microsoft executives did their due diligence and a large cadre of savvy bankers provided their stamp of approval on the deal, recycling a previously disposed item successfully poses some unique challenges.

The Problems

What could possibly go wrong in a sexy, strategic deal that plans to leverage Skype’s power of internet communication across Microsoft’s various businesses including mobile, business software, gaming, and advertising platforms?

  • Sticker Shock: The Microsoft-Skype deal is still in its early phases, but the multi-billion price tag has already elicited heartburn from some investors (heart attacks among others). In Microsoft’s defense, what’s a mere $8.5 billion among friends, especially if your wallet is stuffed with over $60 billion in cash like Microsoft? With the 3-month Treasury bill currently yielding 0.02%, the massive wads of cash that Microsoft (and other tech giants) is sitting on appear to be burning a hole in buyers’ pockets. In a kooky internet world where IPO valuations of $70 billion for Facebook, $25 billion for Groupon, and $3 billion for LinkedIn are freely tossed around, an $8.5 billion Skype offer may seem like par for the course (or even a bargain). Sadly, however, I am having difficulty reconciling how Microsoft will take 663 million money-losing customers at Skype and balance the laws of economics by adding further volumes of money-losing customers. Apple Inc. (AAPL) spends about $2 billion per year in research & development, and is expected to produce more than $100 billion in revenues in fiscal 2011, while the $8.5 billion that Microsoft spent on Skype produced less than $1 billion in revenues last year. I presume Microsoft has some aggressive assumptions built into their Skype forecasts to rationalize the price paid for Skype.

 

  • Failure Déjà Vu: Does the desire to integrate wiz-bang technology into existing product platforms sound familiar? It should – eBay Inc. (EBAY) already attempted and failed at integrating Skype before it threw in the white towel at the end of 2009 and sold a majority $1.9 billion stake of Skype shares back to a group of investors, including the Skype founders. Back in 2005, when eBay paid a then bargain of $3.1 billion for Skype (including earnouts), former CEO Meg Whitman evangelized the “Power of 3” (Skype + eBay’s Marketplace + PayPal) – I suppose new CEO John Donahoe must now promote the “Power of 2.” In Skype merger sequel of 2011, Microsoft’s CEO Steve Ballmer is espousing the benefits of Skype across Microsoft properties such as Outlook, Windows Live Messenger, Xbox, Kinect, and its newly created Nokia Corp. (NOK) relationship. Gaudy priced mergers in the internet/social media space have a way of eventually ending up in the deal graveyard. Consider AOL Inc.’s (AOL) 2008 deal with social network Bebo for $850 million – two years later AOL sold it for $10 million. News Corp’s (NWS) high profile purchase of MySpace for $580 million is reportedly looking for a new home at a fraction of the original price ($50 million). Hewlett-Packard Co.’s (HPQ) ostentatious $2.4 billion value (~125 x’s forward earnings) paid for 3Par Inc. during a bidding war with Dell Inc. (DELL) in 2010 is another recent example of a risky high-priced deal.

 

  • Telco Carrier Skepticism: Although Microsoft has ambitions of taking over the world with Skype, the telecom service carrier companies that facilitate Skype traffic may feel differently. As the telcos spend billions to expand the global internet superhighway, if Skype is clogging traffic on their networks then the carriers will likely require additional compensation – no freeloaders allowed.  

 

  • Rocky Past Marriages: When it comes to acquisitions, Microsoft historically hasn’t fooled around as much as some other large Fortune 100 companies, nonetheless some important past relationships have gone sour. Take for instance Microsoft’s previous largest $6 billion cash acquisition of aQuantive Inc. in 2007. As Microsoft continues to chase Google Inc. (GOOG) at their heels, Microsoft has little to show for the aQuantive deal, except for a lot of employee turnover. The sizable but smaller $1.1 billion acquisition of Great Plains in 2001 has its critics too. Like Skype, the Great Plains business software deal made strategic sense, but six years after the units were fully integrated founder and owner Doug Burgum packed his bags and left Microsoft. 

Consequences

What happens next for Microsoft? I know it’s difficult to imagine that Microsoft’s colossal underperformance since the beginning of 2010 could worsen – Microsoft has underperformed the market by a whopping -38% over that period – but by massively overpaying for Skype’s losses, Microsoft is not making their own job any easier. Although Microsoft has missed many key technology trends over the last few years (e.g., search, mobile, tablets, social media, etc.) and its stock has been in the dumps, the PC behemoth is looking to salvage a previously failed merger into a successful one. Time will tell if Microsoft can recycle a trashed, money losing operation into hefty green profits. If not, investors will be out for blood wondering why $8.5 billion was thrown away like garbage. 

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AAPL, and GOOG,  but at the time of publishing SCM had no direct position in MSFT, Skype, EBAY, AOL, HPQ, DELL, NOK, Facebook, MySpace, LinkedIn, Groupon, Bebo, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

May 12, 2011 at 5:34 pm Leave a comment

The Internet: The Fourth Necessity

The basic necessities for human life are food, water, shelter and most importantly…the internet. Imagine a world where you cannot: access your email; text your spouse or significant other in the same house; Twitter the contents of your lunch; or Facebook a YouTube video of a dancing meringue dog (see video).  Scary thought.

Many people take the internet for granted, just like the air we breathe, but how important a role does the internet play in people’s lives? Mary Meeker, internet analyst from Morgan Stanley, takes a look at this question in a recently released presentation she completed. Earlier in the decade, Meeker was raked over the coals during the deflation of the internet bubble, but in many respects she has been redeemed in the subsequent years as hundreds of millions of people continue to plug into the internet.

According to the broad base of expert strategists, we apparently are living in an overvalued, “New Normal ” market with subdued growth for as far as the eye can see (check out New Abnormal). In the mean time Meeker shows how the top 15 global internet franchises have nearly quadrupled revenue from $33 billion in 2004 to $126 billion today. Perhaps abnormally outsized opportunities in the corporate internet universe will be the “New Normal” over the coming years?

Internet Ubiquity

Source: Morgan Stanley

How ubiquitous is the internet becoming? Last year 1.8 billion people accessed this invisible global flattening medium we like to call the internet, and users spent 18.8 trillion minutes online, up +21% over the previous year. Many people are very familiar with the home-bred internet franchises of Facebook (620 million users), Google (940 million users), and Apple (120 million internet device users), but many investors under-appreciate the global scale of international internet franchises like Tencent (637 million users…more than Facebook by the way), Baidu ($40 billion market value), or Alibaba.com ($10 billion market value).

Source: Morgan Stanley

Mobile ubiquity is on the rise too. Connecting through a desktop or laptop is not enough these days, so internet addicts are increasingly attaching a mobile phone umbilical cord for such useful bathroom applications such as this (click here). Lugging a laptop around all over the place can be an inconvenience. So primal is the mobile instinct among internet users, Morgan Stanley expects mobile phone shipments to surpass PC and laptop shipments over the next 24 months.

What’s Next?

The party is just getting started. If you just consider eCommerce (purchases online), which only accounts for 4% of total commerce conducted in the U.S., then there is a lot of headroom for internet purchases to expand. The incredible potential rings true especially if you contemplate old traditional catalog, which peaked at more than 10% of overall commerce according to some industry executives. The rich feature functionality afforded to users through the internet, coupled with the increased convenience of mobility, augur well for future ecommerce sales growth.

The internet has been around for 15 years, but in the whole scheme of things this transformative medium is just a baby – especially if you consider the amount of time it took other revolutions like electricity, the rail network, and automobile proliferation to spread.  That is why it is not too late to join the internet party.  Food, water, and shelter are human necessities of life, just like exposure to the internet revolution is a necessity for your investment portfolio.

Read the Morgan Stanley Internet Presentation by Mary Meeker

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

http://www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AAPL and GOOG, but at the time of publishing SCM had no direct position in MS, BIDU, Tencent, Alibaba.com, Facebook, Twitter, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 19, 2010 at 1:32 am Leave a comment


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