Thursday, May 19, 2011

How much is Skype worth?

MSFT recently agreed to buy Skype for $8.5 billion.  This seems high, but is it?  Thankfully Aswath Damodaran (NYU Finance Prof and Valuation expert) has done the heavy lifting and put together a valuation of Skype.   You can download his spreadsheet from his posting.

I've taught valuation for several years and I think Prof Damodaran's model is a great example of what a good valuation should contain:
1. Clearly defined inputs and assumptions - don't make your model a black box.  Make it transparent.
2. Sensitivity analysis.  Accept that valuation is not a precise science so show the value changes over a sensible range of inputs.
3. No math errors!

I won't spoil the surprise of telling you what Prof D's valuation ended up at, but it isn't $8.5bn.