Out With The Old, In With The New

I liked the announcement eBay made yesterday about the sale of Skype (65% of it) to private Equity firm Silver Lake for 2 billion dollars. This values Skype at around 2.75 billion dollars. Skype’s second quarter revenues were 170 million dollars. Rough estimate, Skype will do 700 million in revenue for 2009. This gives this deal a 4x multiple.

Silver Lake is one of the principle investors, with TPG, in enterprise communications company Avaya. (disclosure: I work at Avaya) Avaya is bidding for Nortel’s enterprise business unit and has an offer on the table for 475million. Nortel’s enterprise business units revenue could be as much as 2B. That’s only 20% on the dollar. Nortel has a global presence, a strong government practice, is the 3rd largest enterprise communications company in the world and has substantial IP. Yet it’s value is only 20 cents on the dollar. While Skype is primarily a free consumer computer to computer voice service, with 1/3rd the revenues and it’s multiple is 4x.

I think this is a pretty clear sign on where enterprise telecommunications is going.

Things are changing. The way we communicate is changing and the enterprise has been slow to adopt. The old, stuffy, phone sitting on our desk is getting dusty. Enterprise communication is quickly moving to the laptop/desktop. This is Microsoft and IBM territory. I think this move by Silver Lake is classic, “skate to where the puck is going, not where it is”. Despite Nortel’s revenue and customer base, they are not positioned well for the future. Skype on the other hand gives Silver Lakes portfolio company Avaya a tool to get on the desktop and fend off Microsoft.

To become a next generation enterprise communication company; the old school incumbents; Avaya, Seimens, Alcatel-Lucent need to adapt. They need to move to the desktop, they need to embrace communication tools other than voice. Silver Lakes purchase of Skype potentially gives Avaya a huge advantage. It gives Avaya the ability to offer a desktop AND mobile application the consumer market is already familiar with that includes, video, IM/Chat, and voice. Hmm, sounds a lot like Microsoft’s MOC client. (Microsoft Office Communicator)

It will be interesting to see what Silver Lake does with this purchase. What is certainly clear, the multiples don’t lie. The old school enterprise communications companies need to change and change fast.