What’s are the possible ramifications for VG of the acquisition of Skype by Microsoft?

Of course, the potential bearish implication is that MSFT will soon completely dominate VOIP, making it extremely difficult for a much smaller company, like Vonage (VG), to compete and grow. However, even if this is true, and I’m not clear it is, the outcome for VG may still turn out quite positive.

This is because the possibility of MSFT dominating VOIP must have many other very large telecom companies quivering. Specifically, the traditional operators must be quite terrified of a potential huge loss of revenue as MSFT integrates Skype and more traffic is sent over Skype bypassing the traditional networks. Essentially, with MSFT now behind Skype, there is humongous threat developing for the large traditional telecom operators, especially in the wireless arena.

For a good summary of the potential impact for the large telecom operators, see this article on Bloomberg: Microsoft Skype Deal May Strain Relations With AT&T, Verizon

What can these operators due to protect themselves? I think that they must obviously move quickly to combat Microsoft/Skype and the quickest defense would be to purchase a major VOIP player, like VG. So my prediction is that a large telecom company will soon buy out VG at a premium to the current price. It just seems inconceivable to me that other large players in the telecom market will simply sit idly by and watch MSFT grow Skype. They must take some action, and an acquisition seems like the most natural response given the new urgency created by Microsoft/Skype.

The price of VG on an acquisition: I don’t have a clue, but as I have mentioned in previous member-only posts, the current valuation of VG, given its strong cash-flow, is surprisingly still cheap, especially as compared to Skype’s valuation.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in VG. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.