Microsoft’s unexpected announcement last week that it intends to purchase Skype raised more than a few eyebrows. Analysts’ and investors’ skepticism is justified and understandable for a few reasons.
First, Microsoft is set to purchase Skype for about $8.5 billion – a very high premium: more than 400 times Skype’s operating income. The video chatting website’s revenues have grown since a group of investors purchased it in 2009, but the business is still not profitable.
The price seems even more inflated considering no other corporation was actively pursuing the company. Microsoft’s unsolicited and uncontested move to acquire Skype is like being the only person at a date auction and bidding $60 on a marginally attractive person. You’re overpaying for something that’s might not be worth it, and you seem a little desperate.
Microsoft hasn’t reached the point of desperation, but their acquisition of Skype is clearly an attempt to catch up in the Internet sector where the company is falling behind tech rivals Apple and Google.
As an increasing number of tech startups have gained users and popularity, their valuations have risen to bloated levels in a similar pattern.
LinkedIn completed its initial public offering yesterday. In just a few weeks leading up to the company’s public listing, the website’s valuation rose by more than $1 billion.
Other tech companies have also recently seen their valuations balloon. Facebook and Twitter are not yet publicly traded, but they’ve been valued as high as $76 billion and $7.7 billion respectively. As these companies are still private, their finances are not completely disclosed, but from what we do know their valuations are certainly on the high end.
Somehow, corporations and investors have determined that Skype, LinkedIn, Facebook and Twitter are worth a whole lot more than they seem. Either they know something that most don’t or they’re displaying symptoms of tech-bubble-itis, similar to those that hit the stock market in the late 1990s.
This time, however, is different. In the late ‘90s the Internet was still a relative toddler: think modems and the dial-up noises computers made before announcing, “You’ve got mail.” Today, thanks to Wi-Fi internet access and and smartphones, most Americans are “plugged in.”
Internet companies today are also different in that a lot of people actually use their services. In 1998, selling groceries online seemed like a great idea. It was not. But today, 500 million people have “friends” on Facebook. Twitter also has a large following that exceeds 20 million users. But just because a lot of people use a service or a product doesn’t mean that trend will continue.
Social networking is probably here to stay. Its benefits are abundant, obvious and, in some respect, revolutionary. I can see a day in the not-so-distant future, however, when Twitter goes the way of Pokemon and Beanie Babies: a fad that we look back on and ask #Whatwerewethinking?
I’m not a financial analyst or consultant by any means. But I do encourage people to think twice before investing in a seemingly “hot” tech company. Otherwise you might get stuck with little more than a bunch of Princess Diana commemorative stuffed purple bears.
Greg Swiatek is Medill junior. He can be reached at [email protected].
