The recently announced deal, where Microsoft acquired Skype for US$8.5 billion, made me reflect about my opinion that a company should always be profitable (positive economic result) to generate a net value to society.
Of course it is understood that, often, the profit as stated in the GAAP Income Statement should be adjusted to reflect the actual economic result, mostly when intangible assets (such as brands, start-up costs, market share, etc.) are being built and not accounted for in the Balance Sheet.
My consideration so far had been that, if a for-profit company is not (economically) profitable, although some of its stakeholders could benefit from its operations, when considering the sum of all stakeholders' gains and losses, the company would be consuming more resources than the value generated, therefore wasting society’s resources.
Was Skype generating value to the society with its recurring loss, year after year? I do not believe so. What was Skype’s real economic value before the Microsoft deal, a company still losing money after several years of operations? Its stock market value? Maybe.
However, the company had built an intangible asset that few people realized: its value to Microsoft (or the potential negative impact to Microsoft business if it were acquired by Google! – see related article http://www.ft.com/cms/s/3/e4866140-7bef-11e0-9b16-00144feabdc0.html?ftcamp=rss ).
Skype had an intrinsic value not related to its existing operations but, rather, to an outsider, not even a stakeholder. Within Microsoft, even if Skype is still unprofitable but contributes in a larger amount to the overall profitability, it is generating value!
This transaction made me remind that, even if a company is unprofitable, we should still look at the broader picture and see if it is strategically contributing to another party’s profit in a larger amount. If it is, there is a net benefit to society!
Another reinforced lesson is that we, entrepreneurs, should keep the perspective that our company may have an intrinsic or potential value to an outsider (not even stakeholder) beyond what it can generate by itself. Being able to identify such opportunities and work towards profiting from that value makes a lot of sense.
So far, the fall in Microsoft stock price implies that not every shareholder believes all that $8,5 billion value was there. But for the sake of our analysis, let’s assume that Mr. Gates and Mr. Ballmer know what they are doing…
