Skype/MS Deal Justified

In my previous posts, I mentioned how social media companies such as Facebook and Linkedin comes with a hefty price tag well above its share of fair market value, a difference between what investors are willing to pay compared to the fundamentals. This exuberance extends well beyond social media companies onto other technology companies. However, fair value is measured differently among various investor classes. Based on current valuation, Facebook and Linkedin maybe overvalued for individual investors looking to buy and hold them for a period of time but for other strategic investors, it may not be so overvalued.

This is why Skype/MS deal is so controversial, bringing in number of pundits to weigh in on the topic. A couple of days ago, Microsoft purchased Skype for $8.5 Billion dollars while others were valuing it at around 4 to 5 Billion dollars. Some experts argue that Microsoft overbid fearing Facebook or Google are also in the run. However, I believe the real value of this deal will come at the post-acquisition integration phase. Microsoft, through the purchase of Skype has an advantage to really expand its business returning real value to its shareholders. Microsoft has fallen behind its peers in terms of innovation and "coolness" factor. Now that Microsoft is no longer a growth company joining in on the ranks of IBM and Oracle, it needs to revamp its operations in order to re-enter the growth phase. And Skype does just that for Microsoft.

With over 170 million connected users across the globe, it would present Microsoft with an opportunity win back customer who left them for what is considered more hip companies such as Apple. This would also present Microsoft with cross-promotional opportunities increasing earnings for its other divisions. Only time will tell on whether or not Microsoft can really capitalize on this opportunity.