Tuesday 10 May 2011
Skype Deal Is Unlikely to Pay Off for Microsoft
Posted on 22:17 by Maria Scott
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| Skype |
Microsoft has only recently embraced the Internet cloud. But from the perspective of its shareholders, that’s certainly where its $8.5 billion deal to buy Skype belongs.
In theory, it has potential advantages. In practice, Microsoft’s poor track record on mergers and acquisitions and the high price it is paying for Skype mean the transaction is unlikely to pay off.
The idea is that Microsoft can integrate Skype’s voice, video and messaging tools with Office e-mail and its mobile operating system. A recent deal with Nokia could support efforts to promote Microsoft’s smartphone platform, which is 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 in 2007, the $6 billion acquisition of the online advertising group aQuantive — the biggest by Steven A. Ballmer, Microsoft’s chief executive, until the Skype deal — hasn’t borne any noticeable fruit in the battle with Google. Neither has the software giant’s search deal with Yahoo. Yet the price Mr. Ballmer has put on Skype, even without 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 is paying almost 10 times revenue. Even Google trades at only a bit over five times. Put another way, Mr. Ballmer is paying more than 400 times last year’s operating income.
Sure, Skype is growing quickly. Monthly users increased 38 percent last year to 145 million, with the number of paying customers up 19 percent. And the total climbed to 170 million last month. To turn that operating income into a 10 percent annual return on investment, however, even on a pretax basis, it must grow fortyfold.
Microsoft can easily afford Skype. It had $50 billion of cash and short-term investments at the end of March. But it’s hard to see how the outlay, even from cash held overseas, is going to break even for the company’s shareholders. Microsoft was the biggest American loser of market capitalization on Tuesday, shedding more than $1.3 billion in value. That suggests investors in the software giant have a different verb in mind than Skype.
Munis Under Threat
Call it headline risk. Bad press, with stressed state finances, hammered the debt of local governments last year. But the $3 trillion market was never in as bad shape as the doomsayers made out. Still, an improving market — gains in 18 of the last 19 trading sessions through Monday, according to Janney Capital Markets — isn’t immune to stumbles as dysfunctional states tackle budget problems.
Meredith Whitney, a financial analyst, last year made a controversial call that “hundreds of billions of dollars” of municipal bonds would go bad. That helped drive down the market in munis. Yet nothing looks remotely on track for disaster on the scale that Ms. Whitney predicted.
There are less than $10 billion of defaulted bonds outstanding, with just $28 million of those coming from the safest instruments like bonds backed by a state, according to Municipal Market Advisors. Another $22 billion are admittedly showing signs of stress and bear watching, especially if the domestic economy sputters again.
In the meantime, prices have recovered some of their losses and yields on the average AAA-rated 10-year municipal bond have dropped about 13 percent to 2.7 percent this year. Low Treasury rates stemming from the Federal Reserve’s easy monetary policy have helped, but so has a dearth of supply. A surge of issuance could soften the market.
Then there’s demand. Outflows from muni bond mutual funds have slowed. They are running around $1 billion a week, according to Lipper, a firm that tracks fund flows. That’s less than half the pace earlier this year. But a few more of those bad headlines could have investors reaching for their wheelbarrows again.
Though the market seems stable for now, the finances of states like California and Illinois have an outsize influence on investors. The next fiscal year begins on July 1 for 46 of the 50 states, and budget negotiations will gather intensity in the coming weeks. Throw in concern over the federal debt ceiling, and a few jitters, deserved or not, could easily rattle munis.
Read More :- http://www.nytimes.com/2011/05/11/business/11views.html
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