Harvard Case - MICROSOFT'S ACQUISITION OF SKYPE
"MICROSOFT'S ACQUISITION OF SKYPE" Harvard business case study is written by Salvatore Cantale, Jialu Shan. It deals with the challenges in the field of General Management. The case study is 16 page(s) long and it was first published on : Apr 30, 2013
At Fern Fort University, we recommend that Microsoft's acquisition of Skype be viewed as a strategic move to bolster its position in the rapidly evolving landscape of communication and collaboration technology. While the acquisition faced initial challenges, it ultimately proved to be a successful move that enabled Microsoft to integrate Skype's capabilities into its existing product suite, expand its user base, and gain a foothold in the burgeoning market for unified communications.
2. Background
The case study focuses on Microsoft's acquisition of Skype in 2011 for a staggering $8.5 billion. At the time, Skype was a leading provider of voice and video calling services, boasting over 663 million users. Microsoft, seeking to expand its presence in the burgeoning world of online communication and collaboration, saw Skype as a strategic asset. The acquisition aimed to integrate Skype's technology into Microsoft's existing product portfolio, particularly its Windows operating system and Office suite.
The main protagonists of the case study are:
- Steve Ballmer: Microsoft's CEO at the time, who spearheaded the acquisition.
- Tony Bates: Skype's CEO, who played a crucial role in the integration process.
- The Microsoft and Skype teams: Both teams faced the significant challenge of integrating two distinct corporate cultures and technologies.
3. Analysis of the Case Study
Strategic Analysis:
- SWOT Analysis: Microsoft's acquisition of Skype presented both strengths and weaknesses. Microsoft's strong brand recognition, vast resources, and established infrastructure were key strengths. However, integrating Skype's technology and culture into Microsoft's existing ecosystem posed a significant challenge.
- Porter's Five Forces: The acquisition strengthened Microsoft's position in the competitive landscape of communication technology. The acquisition aimed to counter the growing threat from competitors like Google and Apple, who were aggressively pursuing the same market.
- Strategic Fit: The acquisition aligned with Microsoft's strategic goal of expanding its presence in the communication and collaboration space. By integrating Skype's technology, Microsoft aimed to offer a comprehensive suite of communication tools to its users.
Financial Analysis:
- Valuation: The $8.5 billion price tag was a significant investment, but it reflected Skype's strong user base and potential for growth.
- Return on Investment (ROI): The acquisition's ROI was initially unclear, but over time, Skype's integration into Microsoft's product suite has generated significant revenue and user growth.
- Synergies: Microsoft aimed to leverage the combined resources and expertise of both companies to achieve cost savings and revenue growth.
Marketing Analysis:
- Brand Management: The acquisition allowed Microsoft to leverage Skype's established brand recognition and user base to expand its reach and market share.
- Product Development: Microsoft integrated Skype's technology into its existing products, creating a unified communication platform that offered a broader range of features and services.
- Marketing Strategy: Microsoft leveraged its marketing expertise to promote Skype's integration into its product suite, reaching a wider audience.
Operational Analysis:
- Integration: The acquisition presented a significant challenge in integrating two distinct corporate cultures and technologies.
- Change Management: Microsoft needed to effectively manage the organizational change process, ensuring a smooth transition for both Skype and Microsoft employees.
- Operations Strategy: Microsoft aimed to streamline its operations by leveraging Skype's expertise in online communication and collaboration.
4. Recommendations
- Prioritize Integration: Microsoft should have prioritized the integration of Skype's technology and culture into its existing ecosystem. This would have involved establishing clear communication channels, fostering collaboration between teams, and ensuring a smooth transition for both Skype and Microsoft employees.
- Leverage Skype's Strengths: Microsoft should have leveraged Skype's strengths in user experience, innovation, and mobile technology to enhance its own products and services. This would have involved incorporating Skype's features into its existing product suite, developing new products and services based on Skype's technology, and exploring new markets for Skype's services.
- Focus on Innovation: Microsoft should have continued to invest in innovation and product development, leveraging Skype's expertise to create new and compelling communication and collaboration solutions. This would have involved investing in research and development, fostering a culture of innovation, and exploring emerging technologies such as artificial intelligence (AI) and machine learning.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: The acquisition of Skype allowed Microsoft to expand its core competencies in communication and collaboration technology.
- External Customers and Internal Clients: The integration of Skype's technology into Microsoft's product suite provided a more comprehensive and user-friendly experience for both external customers and internal clients.
- Competitors: The acquisition strengthened Microsoft's position in the competitive landscape of communication technology, allowing it to better compete with rivals like Google and Apple.
- Attractiveness: The acquisition was financially attractive, with the potential for significant revenue growth and market share expansion.
6. Conclusion
Microsoft's acquisition of Skype was a strategic move that ultimately proved successful. While the integration process presented challenges, Microsoft was able to leverage Skype's technology and user base to expand its presence in the communication and collaboration market. The acquisition has enabled Microsoft to offer a more comprehensive suite of communication tools to its users, strengthening its competitive position in the rapidly evolving landscape of online communication.
7. Discussion
Alternative Options:
- Partnership: Microsoft could have partnered with Skype instead of acquiring it. This would have allowed both companies to leverage each other's strengths without the challenges of integration. However, a partnership would have limited Microsoft's control over Skype's technology and strategy.
- Internal Development: Microsoft could have developed its own communication and collaboration platform instead of acquiring Skype. This would have given Microsoft complete control over the technology and strategy, but it would have been a more time-consuming and expensive process.
Risks and Key Assumptions:
- Integration Challenges: The integration of Skype's technology and culture into Microsoft's existing ecosystem was a significant challenge.
- Competition: The market for communication and collaboration technology is highly competitive, with rivals like Google and Apple constantly innovating.
- User Adoption: Microsoft needed to ensure that users would adopt its new integrated communication platform.
8. Next Steps
- Continue Integration: Microsoft should continue to integrate Skype's technology and culture into its existing ecosystem, ensuring a seamless user experience.
- Invest in Innovation: Microsoft should continue to invest in innovation and product development, leveraging Skype's expertise to create new and compelling communication and collaboration solutions.
- Monitor Competition: Microsoft should closely monitor its competitors, adapting its strategy to stay ahead of the curve in the rapidly evolving landscape of online communication.
Timeline:
- Year 1: Complete integration of Skype's technology and culture into Microsoft's ecosystem.
- Year 2: Launch new products and services based on Skype's technology.
- Year 3: Expand into new markets for Skype's services.
By following these recommendations, Microsoft can continue to leverage the acquisition of Skype to its advantage, strengthening its position in the communication and collaboration market and driving future growth.
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Case Description
On 10 May 2011, Microsoft announced that it would buy Skype for $8.5 billion. The price tag was undoubtedly high - roughly ten times Skype's revenues in 2010 ($860 million), around twice its recent valuation. In late 2009, eBay sold the majority of its stake in Skype to an investor group led by Silver Lake Partners at a valuation of around $2.75 billion. What makes this more interesting is that Skype itself had not been profitable since its foundation in 2003. So what was the reasoning behind the deal? How did Microsoft finally arrive at that price? Why was it willing to pay such a large amount of money? Was there something more? The brand, the networking, the technology, the possible strategic and product synergies...? Learning objectives: The case provides a good opportunity to discuss valuation issues in a fast-growing company in the high-tech industry. The acquisition was undoubtedly expensive. But how did Microsoft arrive at that price? Let us go back to valuation basics. What was the value of Skype at the time? Although it was a private business, Skype was ready to go to public in 2010 and therefore some inside information is available about its financial performance. Based on these documents as well as analysts' reports, participants can learn how to justify a firm's valuation by using the discounted cash flow method. Both Microsoft and Skype were large-sized companies operating in the technology sector. The case also provides a good opportunity to discuss the characteristics of the industry in general as well as the strategic/synergistic fit of these two companies.
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