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Technology Round Up - June 2, 2011
Microsoft to Acquire Skype
Microsoft (MSFT - Free Microsoft Stock Report) has agreed to acquire Skype for $8.5 billion in cash. Skype is a leading Internet communications company that averaged 145 million connected users per month in the fourth quarter of 2010. The deal has been approved by the boards of directors of both Microsoft and Skype. This combination would extend Skype’s brand and the reach of its networked platform, and enhance Microsoft’s existing portfolio of real-time communications products and services. Skype will become a new business division within Microsoft. It will support Microsoft devices such as Xbox, Kinect, and a wide variety of Windows devices, and will connect Skype users with Lync, Outlook, and Xbox Live. This move reflects Microsoft’s focus on investing in real-time communications across its platforms. Nevertheless, it remains to be seen whether the company can ultimately earn enough from Skype to justify the high price tag.
The market for IPOs (initial public offerings) appears to be perking up again, as reflected by several high profile offerings. LinkedIn has recently completed its IPO. The stock jumped considerably from the original offer price on its first day of trading, but has slid since then. Still, the company is currently valued north of $7 billion. LinkedIn was launched in 2003, and its Web site is primarily used for professional networking. By March of the current year, it had over 100 million registered users. Meanwhile, Russian Internet search company, Yandex NV, has raised $1.3 billion from the public markets. With 64% market share, Yandex operates the largest search engine in Russia.
If IPOs continue at their current pace, 2011 could prove to be the best year for public offerings since the Internet bubble burst in 2000. Investors have already begun drawing comparisons, noting the high valuations and questioning whether enthusiasm for these stocks is somewhat overdone. On the bright side, companies going public now tend to be somewhat more established, with many of them already profitable. Nevertheless, stocks without much trading history are notoriously difficult to value, and potential investors would be wise to tread cautiously here.
Google’s New Smartphone Service Sparks PayPal Lawsuit
Google (GOOG) and MasterCard (MA) have recently introduced a digital wallet, which would allow customers to purchase items and receive coupons by scanning their smartphones at check-out counters. Google would profit by selling associated coupons and advertising. However, eBay (EBAY) (and its PayPal segment) has accused two of its former executives and Google of a wide variety of violations, including misappropriation of trade secrets, breach of contract, intentional interference with prospective economic advantage, and unfair competition. It’s too early to ascertain how this lawsuit will play out. However, one thing seems clear: the nascent mobile-payments market offers tremendous growth potential. This has unsurprisingly attracted the interest of a number of potential competitors, including PayPal. The capability to bring together smartphones, retailers, and banks all onto one electronic payment system would likely be well rewarded. This goal has proven elusive in the past, and a number of obstacles remain for potential providers of this service.
Google’s Bond Offering
Cash-rich Google has recently sold its first long-term bonds, raising roughly $3 billion. This has allowed it to take advantage of the current environment of very low interest rates. Many Internet companies traditionally preferred to fund investments with cash generated from operations. However, as their operations have matured somewhat, such companies often make strategic acquisitions to help them move into new markets and drive growth. Raising additional capital increases the amount of cash on hand for potential acquisitions. For a company with no debt, raising capital though a bond offering (rather than with an equity offering) allows it to reduce its weighted average cost of capital and boost its return on equity. It now remains to be seen if other technology companies will follow suit to take advantage of the current low interest rates.
Barnes & Noble (BKS) has recently introduced a new Nook e-book reader, which is expected to begin shipping June 10th. This new offering will be priced at $139. The company is calling this version the Nook Simple Touch Reader. This device lacks apps, excess buttons, and other complex features, but does have an E-ink screen that allows users to perform searches, purchase titles, open books, and turn pages. This offering is apparently targeted at customers who prefer simplicity. The new Nook has better contrast, weighs less than eight ounces, and is able to store about 1,000 books. The ball now appears to be in Amazon’s (AMZN) court. The company’s Kindle remains ahead of the Nook in the domestic market for e-book Readers, and we expect it will likely include some additional features in future versions to solidify its position.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.