The New York Times goes A1 with a breathless second-day story that shows some of the perils of deal reporting. This one’s about Microsoft’s $8.5 billion purchase of Skype and all the gee-whiz implications that could potentially maybe happen someday at some point.
The lede is bad, managing to be both reminiscent of so much reporting in Tech Bubble the First while also being a “no shit” lede:
Microsoft has peered into the future, and placed a bet that people the world over want to stay in touch with someone anytime and anywhere — preferably at no cost.
Who’s going to bet that people won’t want to stay in touch, but that if they do, they’ll prefer to pay for it? That’s followed by the the broadening graph:
In agreeing Tuesday to pay $8.5 billion to buy Skype, the pioneer in Internet phone calls, Microsoft is embracing a technology that is transforming the way people communicate at home and at work. And by stitching Skype technology into Microsoft products, used by hundreds of millions of people, the software giant could hasten the mainstream adoption of video communications, especially in businesses.
There are an awful lot of hedges and hyperbole in this piece:
…could hasten the mainstream adoption of video communications… could help it better compete… “could really change things for Microsoft…” could change the way people make even the most routine calls… “could give Microsoft a leading consumer Internet service…” aims to keep people seamlessly connected… could find a lucrative revenue stream… might also benefit from placing advertisements… analysts suggest…
Meantime, here are some of the adjectives:
“amazing”… bold… crucial… leading… seamlessly… formidable… “world-class”… lucrative… “great”…
Buried in the seventeenth paragraph: that Skype—at eight years old, long in the tooth for Webland—still loses money. That’s a critical fact. Again, what is this, 1999?
This is a longstanding problem with deal reporting, one Audit Managing Director Dean Starkman has written about repeatedly. Re-read the Times’s lead—and the whole piece for that matter—and then see Dean’s lede from four years ago:
Is it just The Audit, or does anyone else feel that business stories about mergers and acquisitions sound like they were written as though readers should break out champagne and throw their hats in the air?
And as Dean pointed out then, most deals destroy rather than create shareholder value for acquirers.
The Times does have a B1 story that reports on the troubles Skype has had (UPDATE: I completely missed that the paper ran a very skeptical column from Reuters Breakingviews on B2. The Times failed to refer it, but I should have seen it and included it in this post.) But it’s even more deal-centric than the A1 one, framed as a rah-rah, look-how-much-money-they-made piece about the investors who got Steve Ballmer to cough up $8.5 billion for a money loser. Any discussion of Microsoft possibly overpaying for the money-loser is buried in one sentence in the second-to-last paragraph of the B1 piece:
While some worried that Microsoft paid too much, Skype’s investors stand to profit immensely.
No kidding. There’s also no context here on the sky-high valuations spreading across Silicon Valley. Now, Microsoft is paying ten times revenues for Skype and “three times what Skype fetched 18 months ago,” as The Wall Street Journal puts it.
The Journal and the Financial Times do a far better job of emphasizing how high a price Microsoft is paying. The FT has the bubble context on page one:
The sharp increase in price in such a short period prompted warnings from some analysts that a new internet bubble was building, though Microsoft’s share price slipped only marginally on the news.
And the FT has a whole other story devoted to how the Skype transaction raises serious questions about a bubble, reporting in the deal that it has “eye-watering metrics.”
Here’s the WSJ’s page-one lede:
Microsoft racked up a whopping $8.5 billion phone bill to buy Skype even though there were no signs of other serious bidders, as the software giant moved aggressively to ramp up its growth…
Steve Ballmer, Microsoft’s chief executive, defended the price in an interview, saying the deal—the biggest in his company’s 36-year history—will let Microsoft “be more ambitious, do more things.”
And the Journal notes something critical the Times does not: That Microsoft is buying Skype with profits it has held overseas to avoid paying income taxes in the U.S. It also points out that Microsoft has a not-so-sterling track record with big acquisitions.
The WSJ also devotes a Heard on the Street piece to how much Microsoft is overpaying for Skype. It raises the critical question of what the heck Skype’s business model—remember those?—is:
Microsoft’s job may be to make “life better for billions of people” around the world, as CEO Steve Ballmer said Tuesday. But in paying $8.5 billion for Skype, it is improving life mainly for Skype’s owners.
Most of the investors that now own the Web telephony company bought into it only 18 months ago, in a deal that valued Skype at $2.75 billion. In contrast, the chance of Microsoft’s long-suffering shareholders ever seeing a healthy return from Skype is doubtful.
Yes, Skype has a huge user base, 663 million as of Dec. 31, and a well-known brand name. But even in the Internet age, that isn’t enough to generate returns from such a high-priced deal. There still needs to be a decent business model.
Skype doesn’t have that
The Times did put a brief piece up yesterday pointing out that analysts and others are raising questions about what Microsoft paid. That story, however, didn’t make the paper. And if we’re talking about online-only offerings, check the withering criticism of the price from the WSJ columnist Evan Newmark, who says it offers “8.5 Billion Reasons to Fire Steve Ballmer.”
Needless to say, more skepticism is due here from the NYT. The Journal and FT are a model here if we’re going to avoid repeating the media mistakes of the first tech bubble.