Ok, jhsu and nkk, both you guys really need to go to amazon THIS SECOND and buy a book called Barbarians at the Gate. Your perspectives on incentive structures and game theory are making the baby Jesus cry.
What? I may not know a lot about incnetive structures, but I am betting that unless you have a PhD in mathematics or any other Game theory related discipline, I know more game theory then you.
Whether it works yet or not is not germane to the anti-logic your were attempting.
That's not how acquisitions work. Skype's "worth" is contingent on many things, not the least of which is the progress of its products to market. So, YES, SKYPE WOULD DO EVERYTHING IT POSSIBLY COULD TO INCREASE ITS WORTH THROUGHOUT THE NEGOTIATIONS. In many acquisitions, there are contingency premiums attached to getting products to market. A car is a constantly depreciating asset. A company, especially an innovative technology company, is a constantly appreciating asset. Getting a product to work on a new device is "randomly altering" it?
NO! I am not sure that you understand what negotiations are. I agree that subscribers is only one factor in worth, but you have to understand that to a service that has a structure like skype (i.e. free basic features and cool advanced ones for those who pay) has a lot of its worth in customers. For every free subscriber skype gets it becomes more valuable. This is because although technically those free subscribers cost skype money (they user the servers without paying), it means skype's paid service becomes that much more valuable. It becomes that much more of a standard.
Let us take another example (this is a crude one, like the car. It is not meant to have perfect fit, nor is it meant to model the skype situation in a perfectly analogous fashion). Microsoft charges ~$500 for their fullest feature office suite (if we factor all options, we can say the price is ~$275; price for the full mac one is $200 ish IIRC). Apple chagres $80 for its fullest featured one. Why such the disparity? Because the .docx, .pptx, .xlsx, etc formats are a standard in the workplace (mostly). And no one is within 100% compliance other than MSFT. So they can charge a bit (lot) more for what is almost an equivalent product. I know Office has some things iWork does not, and that there are other factors. But do not fool yourself into thinking that MSFT could charge so much more than AAPL if they did not have the standard format. For every person that buys Office, all other copies become that much more standard, that much more valuable to own.
The same is true with Skpe. Every customer that subscribes, paying or not, makes Skype that much more of a standard and makes their service that much more valuable to everyone.
So, here's what happened. Microsoft came to Skype and said they were interested in acquiring them. Skype said sure, "We can negotiate". Skype and Microsoft then sign non-disclosure agreements and open some of their books to one another. Skype shares projections with Microsoft, etc. Skype then has an M&A advisory firm do a valuation of their company through a number of methods such as comparable company market analysis, precedent transaction analysis, discounted cashflow analysis and the like. Skype includes in these analyses the assumption that their Android product will come to market on a specific date, begin to generate revenue and show growth in revenue and profit from that point forward. So, the negotiating part is when Microsoft says, "Ehh...those projections look optimistic", and Skype says, "if anything, they're low". Eventually they agree on the deal because Microsoft believes they can realize future discounted profits and associated synergies from the deal equal to or greater than the price they paid. Nothing stopped in the development department at Skype during these negotiations. In fact, it's likely that very few people at Skype knew anything about the potential acquisition until is was about to be announced.
Right. Nothing stopped in the development. No one said it did. What you just described is the mechanics of negotiation. The seller starts high, the buyer low, and they come to a point in the middle through game involving offers and counteroffers (probably with no real ultimatum). What you missed were the politics of the game; the power plays involved were no doubt somewhat influential (have you have had an ultimatum that may or may not be real worth >$7bn put in from of you? Neither have I. Would you risk walking if it was real?) I would imagine each offer towards the end came with some such "this is the lowest we can go...accounting says we have no more money...you are not worth more...we can develop our own system for less money...etc" type line.
What I want to know is how you, someone who implied at least medicore knowledge of game theory, can say what you said. It is just plain wrong. It attributes not only a finality, but an explanatory power that game theory just does not have.
Delaying the announcement and possibly the release could have been put into the deal for PR benefit. That is a possibility. However, the used car negotiation comparison is nonsensical. The Android product was factored into the negotiations one way or another.
Right. But back to the whole subscribers=value argument...
No one is saying Skype devalued themselves. What we are saying is that when one firm buys another, it is generally not accepted practice to be too aggressive about changing your worth. Just as it is frowned upon to go bankrupt at 7:59:59 am when the official signing takes place at eight (there are rules/agreements that stop this, I know), it is bad practice to gain worth, too.
-Nkk
