Cisco Planning to Acquire Skype

Networking gear maker Cisco Systems (CSCO - Analyst Report) has offered $5 billion for the Internet telephony company Skype, TechCrunch, a leading Silicon Valley blog, reported recently. The deal, if successful, would derail a planned initial public offering from Skype and redraw the battle lines in the lucrative market of video communications. Skype is reportedly looking for a valuation of $5 billion.

Google (GOOG - Analyst Report) was also rumored to have considered making a bid for Skype, but antitrust concerns prevented the search giant from making an actual offer, the blog reported. Ironically, Google added a free phone-calling service to its Gmail email service last week, a move that was seen as putting the company in direct competition with Skype.

Skype’s attraction lies not only in its video-conferencing capabilities but also its huge worldwide subscriber base. Skype has a registered user base of 560 million, but most of its revenue is generated from nearly 8 million users who pay for its inexpensive computer to landline and mobile phone calling services. Keeping that in mind, it will be interesting to see how Cisco justifies a $5 billion price tag for a company which had revenues of $406 million in the first half of the year and a GAAP profit of $13 million. eBay (EBAY - Analyst Report) sold Skype to a group of private investors, led by Silver Lake Partners, for about $1.9 billion.

In June, Cisco had announced that it was working an Android-based tablet computer device Cius aimed at the videoconferencing market. Skype’s expertise in video conferencing will help Cisco augment its IP telephony services that it provides to enterprises.

Indeed, it could be challenging for Cisco to tap Skype’s subscriber base to turn its fortunes around. Skype has eluded profitability in four of the last five years and cash-rich e-Bay, which still retains a considerable stake in the firm, found it difficult to help Skype turn a profit. One way to bring Skype back to profitability would be to make its video-conferencing services chargeable, but that would not come without downsides. However, if Cisco is able to successfully tap Skype’s registered user base, it would emerge as one of the largest Internet calling service companies in the world.

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