Ask the Advisor: When Microsoft Buys Skype, Who Benefits?

Question: Is the Microsoft purchase of Skype a good thing? Who will benefit the most?

When a large company buys a relatively smaller company, one may intuitively guess that it's good news: The larger company becomes more valuable by acquiring a rising star and the smaller company gets to grow faster by taking advantage of the larger company's widely-accessible products and service. It's not quite that simple.

The Anatomy of a Corporate Merger

Typically the larger company, in this case, Microsoft, must pay a pretty hefty premium price to buy the smaller company, Skype, to insure other potential buyers don't swoop in and offer a higher price. Microsoft purchased Skype for more than $8 billion, which in financial value relevance, is a significant premium. In other words, Skype is not worth $8 billion today but the Microsoft thinks the potential for future returns is great enough to pay this premium price.

Owners of the company being purchased in these deals, Skype in this case, tend to be the greatest benefactors because they are on the receiving end of the premium price. Imagine owning stock in a company and its price immediately jumps 20% or 30% because some other company comes in and buys it.

In summary, a large purchase tends to drain the larger company of assets (or increase debt), which often has the results of reducing the larger company's stock price (Microsoft stock price is down nearly 4.0% in the last 2 days); whereas the smaller company tends to enjoy a short-term bounce.

Considering the Big Picture View for Investors

The big picture view for investors is whether or not the acquisition is a good "marriage" or not, which remains to be seen. Certainly, Microsoft could leverage Skype in such a way that it could integrate Skype's voice and video capabilities with Microsoft Office tools via the Internet.

In summary, these big corporate acquisitions are interesting to observe but they don't really change the reality of the markets. If anything, smaller investors could feel just a bit more positive if an acquisition trend materializes because strong merger activity can be good for financial markets and the overall economy.

Kent Thune is a Certified Financial Planner™ and owner of an independent, "fee-only" investment management firm in Mount Pleasant, SC. Kent is also a freelance writer. To read more of his work or to find out how to contact Kent, please visit his blog at The Financial Philosopher. Have a question? Email AsktheAdvisor@savings.com.

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