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Does Cisco (CSCO) Really Want to Buy Skype?

Tech giant could purchase firm before planned IPO


Rumors abound that Cisco Systems Inc. (NASDAQ: CSCO) plans to make an offer to acquire Skype in an effort to short-circuit Skype’s planned IPO. Ebay, Inc. (NASDAQ: EBAY) sold 70% of Skype to a group of private investors led by Silver Lake Partners in November 2009 after the auction site couldn’t figure out a way to make money with the VoIP service. Skype claims more than 500 million users and, as part of its IPO filing, reported GAAP profits of $13 million on $406 million in revenue during the first six months of 2010. Skype is believed to be aiming for an IPO of about $5 billion.

That might be a bit rich, considering the transaction between Ebay and Silver Lake put a value of about $2.75 billion on Skype. And the competition is getting stiffer. Google Inc. (NASDAQ: GOOG) has just released its Call plug-in for Gmail, which offers free calls in North America at least for the rest of 2010, and perhaps beyond. Other free email providers, like Yahoo! Inc. (NASDAQ: YHOO) and Microsoft Corp. (NASDAQ: MSFT) do not yet have VoIP offerings, but will probably need something to compete with Google. The search for competitive offerings could lead to offers for VocalTec Communications Ltd. (NASDAQ: CALL) and Vonage Holdings Corp. (NYSE: VG), both of which have market caps below $500 million.

Likewise, carriers like AT&T (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) have not endorsed or offered VoIP service for their customers who use PCs. Of course, such an offering could kill what’s left of these carriers’ land-line service. The carriers have been losing land-line customers for some time now, and if they were smart, they might devise a plan that would allow them to cannibalize their land-line business and move those customers who want it to a VoIP service.

If Cisco does make an offer for Skype, the deal may have a different target. In late June, Cisco announced a tablet device, the Cius, which includes a telephone handset and a port for a wired Internet connection. Cisco said that the device was aimed at the videoconference market, which it said at the time would grow to 200 million users by 2015. Adding VoIP capability to the device simplifies the voice transmission part of videoconferencing, and could be used either with a wireless or wired Internet connection.

If offering a unique, business-oriented tablet device is Cisco’s goal, acquiring Skype makes a lot of sense. Competitors for that space include Hewlett-Packard Co. (NYSE: HPQ), Research in Motion Ltd. (NASDAQ: RIMM), and Dell Inc. (NASDAQ: DELL), and none has any VoIP capability.

The $5 billion price tag is awfully high for a company that looks on track to post about $800 million in revenue for 2010. But Skype’s value, and that of the other VoIP companies, may finally realize the potential they’ve always had.

As of this writing, Paul Ausick did not own a position in any of the stocks named here.

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