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Cisco to Acquire Skype? Price Tag May Be Hard to Justify

By Susan J. Campbell, TMCnet Contributing Editor

Is Skype soon to have a new home? According to a Zacks report, an offer for $5 billion has been made by Cisco Systems to acquire the Internet telephony company. The offer was originally reported by TechCrunch.

If successful, the deal would quickly derail a planned initial public offering from Skype (News - Alert) and would certainly redefine the battlefield in the lucrative market of video communications. It has been reported that Skype was seeking a valuation of $5 billion.

The rumors don’t stop there. While we excitedly watched the bidding war between HP and Dell (News - Alert) over 3Par, the buzz around Skype is sure to be much more exciting as Google may also be considering making a bid for Skype.

The only problem is antitrust concerns prevented the search giant from actually making an offer. And, the company last week added a free phone service to its Gmail platform in a move that could easily pit them in direct competition with Skype. Taking ownership of Skype would certainly be an easy fit, but does Google need the hassle?

It may all depend on Google’s strategy where video-conferencing is concerned. Cisco (News - Alert) dominates this space, but not for SMBs and SMEs who can’t afford the more robust systems. Skype may provide the link to these markets with significant opportunities.

The biggest draw Skype offers is in its video-conferencing capabilities and worldwide subscriber base. Its registered user base sits at roughly 560 million, although most of its revenue is generated from nearly 8 million users who pay for the inexpensive computer to landline and mobile phone calling services.

Some may argue that Cisco will have a hard time justifying the $5 billion price take for a company with $406 million in revenue in the first half of the year and a GAAP profit of just $13 million. A look at the bigger picture – such as video conferencing in the SMB and SME market – and Cisco may not have to try too hard for this justification.

Skype has continued to elude profitability in four of the last five years and even eBay (News - Alert) – with a considerable stake in the firm – has found it difficult to help Skype turn the tables. But, where eBay has little to no experience, Cisco has it in spades. And, if the company can leverage the registered Skype user base, it would become one of the largest Internet calling service companies in the global marketplace. Is it worth a shot at this investment? I’d have to say so.
Susan J. Campbell is a contributing editor for TMCnet and has also written for eastbiz.com. To read more of Susan’s articles, please visit her columnist page.

Edited by Beecher Tuttle