Will Cisco Swoop in to Buy Skype Pre-IPO?

Will Cisco make a play for Skype?Late last night, TechCrunch broke the news that Cisco (NASDAQ: CSCO) made a bid for Skype in an attempt to take over the company before it completes its IPO.  This comes within a week of Google’s (NASDAQ: GOOG) launch of Google Calls, before the blogosphere could sort out whether Google Calls is a “Skype-killer” or just merely a nuisance (although the nuisance argument had been gaining momentum).  Barring an acquisition, Skype is one of the key players in this fall’s hot slate of upcoming IPOs.

This wouldn’t be the first brush with big cap tech interest, as Skype had been operating under eBay’s (NASDAQ: EBAY) ownership from 2005 to 2009.  eBay bought Skype in 2005 for $2.6 billion and sold most of the company at an estimated valuation of $2.75 billion to a group of private equity investors in 2009.  Ebay, to this date, maintains a 35% ownership interest.

Cisco, as a diversified networking powerhouse, with hardware, software and networking operations makes for an interesting potential acquirer.  In their recent bummer of an earnings release, Cisco did in fact elicit some pockets of optimism in their plan to hire another 3,000 employees in the face of “unusual uncertainty” and a buyout of Skype would certainly fit the bill as a move to “embrace uncertainty.”  Skype insiders had been hoping for a $5 billion initial public offering, and it’s conceivable that in order to seriously consider Cisco’s bid, it would have to at minimum match that $5 billion figure.  With somewhere around $40 billion in cash, or cash equivalents, that should not be all that difficult for this tech behemoth to do.

With word of Cisco’s interest, now is a good time to dig into the Skype Form s-1 IPO Registration Statement for some additional information that could shed some light on why Cisco would preempt an IPO in making a bid for ownership.  Here are some key points:

  • The majority of Skype’s users continue to be of the free variety.  These users connect with other Skypers using web-based audio calling, instant messaging, and the relatively new video calling.  Together, users made 95 billion minutes of voice and video calls, with video now accounting for 40% of all Skype-to-Skype minutes.
  • Existing users, of both free and paid services, exhibit an impressive amount of loyalty to Skype’s services.  According to the filing, “pay-as-you-go billings for users who first registered with Skype before 2008 were substantially the same in December 2009 as they were in December 2008.”
  • So far in 2010, Skype has grown its user base by 41% year-over-year, with registered users climbing from 397 million to 560 million people.  During that time, paid users grew by 23%, from 6.6 million to 8.1 million.
  • For the first half of 2010, Skype reported EBITDA of $115.8 million, up 53.9% from the $75.2 million earned in 2009, on net revenues of $406.2 million, up 25.1% for the same period.
  • In their IPO filing, Skype asserts that the growth in its user-base enables “viral” marketing efforts, while simultaneously affording the company the opportunity to seek out strategic partnerships in key areas.  One such partnership is with Verizon Wireless, which offers Skype’ software and services to millions of cell phone users.  The mobile market can be a key driver of future growth for Skype as more mobile data transitions from traditional cellular calling to more far-sweeping “data” plans that include full Internet access.
  • Avenues of future growth begin with the expansion of Skype’s existing user base, and include “improve[ing] awareness and adoption of…paid products” and the development and marketing of new premium products, including group video calling, and a suite of business products for small, medium and large businesses.

The fact that Skype enjoys such a large and growing user-base is very attractive for a technology company to both monetize on its own, and to upsell an existing suite of products.  With Cisco’s strong footing in the networking sphere, the company already has the infrastructure in place to maximize Skype’s existing service offerings.  This is very different from eBay’s attempt to expand beyond their core business.  As mobile Internet use expands in terms of usership, capacity and capabilities Skype now has a new point of attack in aggressively growing their potential lines of business.  Stay tuned as this story unfolds.