Tuesday, May 10, 2011

A Very Un-Buffett-Like Acquisition

The Microsoft acquisition of Skype, in which Microsoft reportedly outbid the supposedly free-spending folks at Google by 100%, may prove an act of exquisite genius.

But we have our doubts.

Compare the $8.5 billion Microsoft is spending for Skype's $860 million of 2010 revenue (and negative income) with the $10 billion Warren Buffett is spending for Lubrizol's $5.4 billion of 2010 revenue (and three-quarter-billion income), and then ask yourself "Which has a better shot at paying off?"

Of course, one of the arguments in favor of the Skype deal--synergies and users and eyeballs aside--is that Microsoft gets a chance to use some of its offshore cash to buy the Luxembourg-based telephony business. In a sense, it's "free money," say the admirers...which is always a dangerous way to justify a deal. (Just ask the AOL shareholders who paid for Time-Warner with inflated AOL stock...)

Indeed, as big and splashy as this deal seems, we'll bet dollars to donuts the write-off will be just as big and splashy.

In the meantime, we're working on an update here from the Berkshire shareholder meeting, now that the dust has settled.

Whether we get it out before the Skype write-off is a bet we wouldn't take.



Dave said...

Exactly the point I was making to a colleague yesterday. When you pay for something with "free money", does it have any value? My guess is that in 5 years, we will all laugh at this transaction as a "shareholder value enhancement" that was quickly flushed down the drain.

Anonymous said...

Jeff, when is your book coming in versions other than kindle?

Jeff Matthews said...

The book will next be available on iPad first, then print-on-demand at Amazon second. (Of course, iPad users can download the Kindle app and read the Kindle version on their iPad.)

The goal is to maintain an updatable book that is always current, which is why we are using these formats.

Hope this works.


Anonymous said...

And it will only take facebook implanting video chat them selves and skype becomes pretty much worthless. Skype's value is that 'everybody' uses it - but more people use facebook.

Anonymous said...

True MSFT may have overpaid, but that wasn't the case for Silver Lake who also made "A Very Un-Buffett-Like Acquisition."

But Silver Lake made $ 2.9 billion in about 18 months and have had a good record for years. It's not always a Buffett criteria that makes for a good investment.

Jeff Matthews said...

Silver Lake bought what they perceived as great value, paid the right price and, when as the tide moved in their favor, found the right buyer. They did the exact same thing a decade ago when they bought Seagate at a time when nobody wanted to own disk drive companies.

This is not a comment about Silver Lake. It's about Microsoft.


Anonymous said...


I'm not talking about MSFT either. I'm talking about looking thru a Buffett lens every time you see an investment -- and it's not only wrong but potentially quite unprofitable -- depending on what it is.

Skype and Seagate would *never* have made a Buffett screen. But that doesn't make them bad investments -- depending on whether you as investor can add value. In Silver Lake's case, they're good at cost reduction and then the flip. Very Un-Buffett but very profitable.