Microsoft to Buy Skype, and We Can’t Wait to See the Business Combination Accounting

Trying to follow and quantify the intellectual property that will convey in the $8.5B transaction, especially given Skype’s recent history, is next to impossible.

When eBay bought Skype from Joltid in 2005, as unbelievable as it seems, the $2.6B price tag didn't include the peer-to-peer software that drove the system. Well, apparently it included a license to the software, which had limited, conditional terms. When Ebay sought to sell Skype to an investment group, the owners of the software (Joltid, founded by Skype developers Niklas Zennstrom and Janus Friis) cried foul, claiming Ebay no longer had the rights to the underlying software, and litigation ensued in the UK. At risk was the entire business known as Skype.

The litigation was settled in November, 2009. That settlement included the awarding of 14% of Skype to Joltid in exchange for ownership of the software plus other financial considerations. (That’s right, Niklas and Janus got part of Skype, again, as a result of the initial Ebay oversight, and that settlement valued the company at $2.75B. It seems now that sleight-of-hand in the Ebay agreement has earned the inventors directly another $380M.) Skype took a $344M charge as a result of that settlement.

There are reportedly four patents that should be part of this deal (though I haven’t seen any details on this). IAM Magazine does not think Microsoft will make the same mistake eBay did, “You can bet your bottom dollar that Horacio Gutierrez [Chief Intellectual Property Officer for Microsoft] and his team have been heavily involved in the due diligence that must already have taken place, and will also be in the thick of what comes next. They will check every patent, copyright, trade secret and other right to make sure that Microsoft is getting exactly what it is paying for.” Skype lost money in 2010, on over $800M in revenues, but there are over 700 million registrants and 170 million active users. It will be interesting to see how Microsoft management monetizes these customer lists (or at least forecasts their monetization). Nearly all this purchase price has to be allocated to the intangibles. An $8.5B deal should be material even to Microsoft, and we will be watching their SEC filings for how they report it.