Skype deal: is it a tech or infrastructure deal?
The truth is, the Silver Lake-led acquisition of Skype looks like both a technology and an infrastructure investment. Which may partially explain why Canada’s CPP Investment Board was able to get comfortable putting US$300 million into a deal that will live and die based upon technology and customer trends over the years to come.
For US$1.9 billion in cash and a US$125 million note, an investment group led by tech-saavy private-equity firm Silver Lake Partners (including venture-capital firms Index Ventures and Andreessen Horowitz, as well as the Canada Pension Plan Investment Board) now own 65% of Skype. eBay keeps the rest. The US$2.75 billion valuation is healthy compared to a run-rate revenue of US$680 million; Q2’s revenue was up 25% versus the prior year. I was but one of the 142 million users registered for Skype during the previous 12 months. I suspect more than a few came via the profile Skype gets from the Oprah Show.
CPPIB is teaming up with people who know Skype well. According the the WSJ, London-based Index Ventures funded Skype before eBay bought it four years ago: “We feel like there’s still enormous potential for this company going forward,” said Index’s Managing Partner. Venture capitalist Marc Andreessen also joined the bidding group. Mr. Andreessen is in the bizarre place of being on both sides of the deal as an eBay director (he recused himself from the eBay board mtgs on the matter); Andreessen Horowitz has invested 17% (US$50 million) of its new US$300 million fund in the Skype buyout deal.
With Mr. Andreessen joining the syndicate with a meaningful slug, you can imagine this came as a great comfort to CPPIB…not to mention the return of one of the VC investors (Index) who sold Skype to eBay in the first place. As co-investment memos go, this would have had all of the elements required for a slam dunk.
Silver Lake is the granddaddy of tech buyouts. They’re the type of people who buy Royal Philips Electronics NV’s semiconductor unit, Flextronics, UGS PLM Solutions From EDS, Sabre Holdings, Seagate, SubGard, Avaya and Instinet.
For those who haven’t been paying attention (see prior post “CPPIB U.S.A. general partner Q1 2009 performance numbers” August 31-09), CPPIB committed US$100 million to Silver Lake’s 2004 US$3.6B Fund II, and US$500 million to Silver Lake’s 2006 US$9.6B Fund III.
Although Silver Lake Fund II is down 2.9%, and Fund III is down 46.3% (early days for that fund vintage), it is easy to see why this deal appealed to CPPIB. They’ve got three of the best partners in the world for this specific transaction. 17.6x forward EBITDA might seem like a steep multiple for an infrastructure deal when Teranet went for sub 10 as I recall, but the tech flavour of Skype can’t be ignored.
Now comes the tricky part. First, getting us one-time users to dump MSN and come back for a second try and spend some money while we’re there. Second, getting it listed via an IPO before 2012.
All in all, a neat deal.
Here’s my take on the deal: I think they overpaid.
One overlooked aspect is how synergistic it is with Avaya, which CPPIB and Silver Lake also own. The new world of CPE voice/video/data will be all IP. The new media servers and handsets (replacing the traditional PBX) will be all IP.
Imagine me sitting in my Deloitte office: I can make a long distance call internally over our own network for practically nothing. But outside that network it could be costly.
Now imagine my new Avaya phone has a button on it that says "Skype" — and allows me to call any other CPE phone (or PC) for free with a single click. And with all of Skype’s pretty good unified communications software and user interface?
The ‘sensible’ price that a private equity investor paid for Skype might be x…but it could be much more than x if they ALREADY OWN A PBX COMPANY.
Maybe Silver Lake and CPPIB aren’t as stupid as some commentators have been saying?