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Bill Gates masterminded Microsoft's $8.5B USD purchase of Skype. A fund closely affiliated with Mr. Gates, Silver Lake Partners made $2.9B USD off the purchase. But an inside source reveals to us that Mr. Gates had no stake in the fund branch that purchased Skype. Thus despite his large investment in Silver Lake Partners he will receive no compensation from the deal.  (Source: UPI)

Bill Gates has been portrayed in pop culture as a ruthless negotiator.  (Source: Matt Groening/20th Century Fox)
Fellow Silver Lake investors win big, but Bill Gates earns nothing

Those following the world of finance might have paused and wondered why Microsoft would pay $8.5B USD to buy Skype, when many experts valued the company at less than half of that amount.  

Well it turns out a lot of the pressure to buy Skype originated from Microsoft founder and tech icon Bill Gates.  

We were the first to note Mr. Gate's ties to Silver Lake Partners, one of the principle groups that profited from the Skype acquisition.

We can now confirm with strong accuracy that Mr. Gates' funds were not involved in the acquisition, despite Mr. Gates' deep involvement in a earlier Silver Lake Partners fund.

I. Bill Gates Says he Masterminded Acquisition

Bill Gates may have stepped down from the position of CEO of the world's largest software company Microsoft Corp. (MSFT), but apparently he still calls the shots at the company he co-founded.  Mr. Gates, a major Microsoft shareholder and Chairman of the company's investor board, sounded off in an interview with UK news agency BBC News, in which he said that he was a driving force behind Microsoft's $8.5B USD acquisition of Skype.

The acquisition shocked many, as the price was almost double some experts' valuations and came seemingly out of the blue.  Some perceive the purchase as a sign that Microsoft is growing concerned with public interest in rival Google Inc.'s Google Voice service.

In an interview with BBC reporter Stephen Sackur, Mr. Gates gives confirmation that the deal was obstensibly a strategic one.  He states, "I think it's a great, great deal for Skype. I think it's a great deal for Microsoft."

"The idea of video conferencing is going to get so much better than it is today. Skype actually does get a fair bit of revenue," he adds, "It'll be fascinating to see how the brilliant ideas out of Microsoft research, coming together with Skype, what they can make of that."

And he reveals that he promoted the acquisition, stating, "I was a strong proponent at the board level for the deal being done."

II. Sale a Big Payday for Some Silver Lake Partners Investors -- But Not Mr. Gates

Compelled by that question we discovered an intriguing connection.  Mr. Gates had close ties to to one of the funds that purchased Skype.

Skype, Inc. was founded in 2003 by Niklas Zennström from Sweden and Janus Friis from Denmark.  The service's key developers were well known for authoring the infamous peer-to-peer filesharing client Kazaa.  In September 2005 eBay, Inc. (EBAY) purchased Skype for $2.5B USD, a handsome payday for its European founders.

But Skype proved a poor fit for eBay, whose core offerings were its titular auctions website and the popular billing service PayPal, which it gained through a separate prior acquisition.  Skype was the odd man out.

Despite Skype's exploding popularity, revenue remained low.  So in September 2009 eBay sold 70 percent of Skype to a group of investors for an estimated $1.9B USD, valuing the company at $2.75B USD overall. 

Leading the group of investors was Silver Lake Partners, who poured $940M USD into it, and reportedly stand to make $2.9B USD off the Microsoft purchase.

But Bill Gates was no stranger to Silver Lake -- in fact he was one of its principal investors.  Mr. Gates, along with Oracle Corp. (ORCL) CEO Larry Ellison and Dell Inc. (DELL) CEO Michael Dell, helped to pour over $2.3B USD into Silver Lake in 1999 [press release].

Initially it appeared that Mr. Gates might have had money tied to the Silver Lake Partners fund that owned a major share of Skype and thus might be in line for a piece windfall profits from the deal.

However, a source close to Silver Lake Partners has confirmed to us that Mr. Gates was not invested in the fund that purchased Skype.

The source tells us that Silver Lake Partners is primarily funded by blue chip investors with large amounts of venture capital -- such as Mr. Gates.  The fund also has taken on some capital from pension funds.  The funds' structure is not immediately revealed to outside parties, but the source tells us that each major round of venture capital corresponded to discrete assets purchases.

Mr. Gates was involved in the first round of funding, known as the Silver Lake 1 fund.  The Skype purchase was made from a third round of funding, dubbed Silver Lake 3, which Mr. Gates was not a part of.  The source would not comment on fund mixing other than to state explicitly that the Silver Lake 1 and Silver Lake 3 funds were not mixed.

Silver Lake Partners refused to comment regarding the investors involved in particular funds or the fund structure, stating that they normally do not reveal who contributes to their funds to protect their clients' privacy.  

But our trusted source confirms that Mr. Gates had no financial stake in Silver Lake 3, and thus will not stand to profit from sale, despite his close ties to the fund and major investment in Silver Lake 1.

Mr. Gates has seemed bearish on Microsoft over the last year. In the last year he sold over 90 million shares of Microsoft stock, cutting his holdings in the company by 13 percent.  The recent selling has concerned some Microsoft investors.  However, Mr. Gates, in his comments, remains optimistic about the future of the company he founded.  And he clearly seems to think that the Skype deal improved Microsoft, even if the deal may rub some analysts the wrong way.





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Right...
By cochy on 5/18/2011 4:04:40 PM , Rating: 2
Cause I'm sure $56 billion isn't already enough for him?




RE: Right...
By ClownPuncher on 5/18/2011 4:15:03 PM , Rating: 1
After a certain amount of money, you would stop making good investments?


RE: Right...
By cochy on 5/18/2011 4:28:59 PM , Rating: 4
You don't get my meaning. After say $50 billion you might think it's not worth the time to have a scandal like this for a few hundred mil no?


RE: Right...
By melgross on 5/18/2011 7:00:58 PM , Rating: 4
Let's not forget that while she was worth over $300 million, Martha Stewart got caught on an insider trade of just $250 thousand. That was a trivial amount. It's very possible that Gates could have seen a profit of a half billion or even significantly more, depending on his percentage of the $8.5 billion deal.

In the long run, his finances are likely more important to him than the small hit MS would have taken.

Now, talking about legality, it would depend on how involved he was, and how he benefitted. As he's not divorced from MS, he could be in trouble if it were shown that he "forced" this deal to the detriment of MS for his own benefit. In other words, if it can be shown that the price paid for Skype was so far above a proper valuation that the price paid had little relation to the value, or what they could have gotten it for, and that he was a major beneficiary of the deal he led, then that would be illegal.

The problem is that you're not supposed to be on both sides of a deal at once. A question has to do with the chess problem of playing yourself. If you know the moves both sides make, how can you be regarded as fair and objective. An executive, or board member has a fiduciary duty to the company to get them the best deal. We can see the problem if one has major investments of both sides. Ethically, he should have recused himself from any discussions or decisions. If he didn't he could be in trouble.

Greed is interesting. People do things they have no need of doing because they just can't resist.


RE: Right...
By JasonMick on 5/18/2011 8:51:28 PM , Rating: 3
quote:
Now, talking about legality, it would depend on how involved he was, and how he benefitted. As he's not divorced from MS, he could be in trouble if it were shown that he "forced" this deal to the detriment of MS for his own benefit. In other words, if it can be shown that the price paid for Skype was so far above a proper valuation that the price paid had little relation to the value, or what they could have gotten it for, and that he was a major beneficiary of the deal he led, then that would be illegal.

The problem is that you're not supposed to be on both sides of a deal at once. A question has to do with the chess problem of playing yourself. If you know the moves both sides make, how can you be regarded as fair and objective. An executive, or board member has a fiduciary duty to the company to get them the best deal. We can see the problem if one has major investments of both sides. Ethically, he should have recused himself from any discussions or decisions. If he didn't he could be in trouble.

Greed is interesting. People do things they have no need of doing because they just can't resist.


Actually Gates appears to be in the clear here. A trusted source close to Silver Lake Partners has confirmed that while Mr. Gates indeed holds a large stake in one of the holding firm's funds, that fund was not used to purchase Skype.

The source says the outside structure of the fund is not widely publicized and the fund's investors are confidential.

But they were explained that Mr. Gates' investments were solely in Silver Lake 1... an early fund, versus Silver Lake 3, a more recent fund used to buy a stake in Skype from eBay. The source says that there was no mixing of Silver Lake 1 and 3


RE: Right...
By mcnabney on 5/19/2011 9:11:22 AM , Rating: 2
Criss Cross

Bill does something to enrich his pals, later they will do something to further enrich Bill.

Kind of like if I would agree to kill your wife while you agreed to kill mine. There is no clear motive for either action. The true motive only appears when all transactions are revealed.


RE: Right...
By bah12 on 5/19/2011 9:48:06 AM , Rating: 3
quote:
Kind of like if I would agree to kill your wife while you agreed to kill mine.
Wow tin foil hat, whats with the negative analogy. How about I would take care of your kids if you passed away, and you would take care of mine if I did. Since when does helping a friend out become an "evil" act (rhetorical question its obvious you think its evil when they both are well off).

Be honest with yourself, and you will realize that it is human nature to "repay" favors with favors, and usually those charitable actions start with people you consider friends.

Just because he has $$$ and his friends have $$$ does not mean there is something wrong with scratching each others backs. The law is clear as long as he does not directly benefit there is no wrongdoing here, other than your obvious hatred for people with money helping other people with money (they should just give it to you right?).

If I was in the market for a company and I overpaid my buddy for his, what is wrong with that? Its a fully taxable transaction, there is no evasion in that respect. So I don't get your problem with it, even if his already rich buddies got richer.


RE: Right...
By mcnabney on 5/19/2011 1:39:30 PM , Rating: 2
Simpsons did it.

As did Law & Order and numerous others. It was the first thing that popped into my sad little mind.

/I love my wife
//Please don't kill her
///Who would iron my shirts?


RE: Right...
By Snow01 on 5/20/2011 12:14:24 AM , Rating: 2
The problem is Microsoft is a public company. They have shareholders that expect the company to make financially sound decisions - especially considering it's largely a dividend stock. No one pays double market value for something just because. The association of Gates with the firm that stands to make a large portion off the deal is certainly suspect. While perhaps not technically illegal, the morality of his involvement can certainly be called into question.


RE: Right...
By sviola on 5/20/2011 10:47:47 AM , Rating: 2
Isn't Bill Gates the largest MS shareholder?


RE: Right...
By epobirs on 5/19/2011 8:35:28 AM , Rating: 3
Martha Stewart was not convicted for insider trading. She was convicted of other violation relating to the investigation. Her big mistake was not lawyering up immediately and assuming the feds would quickly withdraw after it became clear there was nothing to the allegations. Never, ever cooperate when the feds come knocking. Once they become invested in making you a public example they will find something to pin on you, no matter whether it has any relation to the original cause of the investigation.


RE: Right...
By mcnabney on 5/19/2011 9:12:33 AM , Rating: 2
She plead to a lesser charge. What she did was classic insider trading.


RE: Right...
By rudy on 5/19/11, Rating: 0
RE: Right...
By ClownPuncher on 5/18/2011 7:57:34 PM , Rating: 2
Nahh, this is how you stay in the news. All publicity is good publicity, right? :0


RE: Right...
By epobirs on 5/19/2011 8:39:51 AM , Rating: 2
After a certain point the money is just for keeping score. The point is the achievement in engineering the deal.

The toys may be fantastically expensive but it remains a game.


How is this surprising?
By MrTeal on 5/18/11, Rating: 0
RE: How is this surprising?
By cochy on 5/18/2011 4:07:50 PM , Rating: 5
This "payday" isn't even worth the time Gates would need to spend talking to Balmer about.


RE: How is this surprising?
By Da W on 5/18/2011 4:30:19 PM , Rating: 5
TOTALY STUPID!

Gates own much more Microsoft shares than he could ever own Skype shares. He would lose 8,5 billion from his right pocket to make a fraction of it in his left pocket?

66% of Skype was held by the canadian pension fund by the way.


RE: How is this surprising?
By mcnabney on 5/19/2011 9:16:23 AM , Rating: 2
How is that possible when eBay still owned 30% and Silver Lake owned 25%?


RE: How is this surprising?
By JasonMick on 5/18/11, Rating: 0
RE: How is this surprising?
By MrTeal on 5/18/2011 4:21:57 PM , Rating: 3
Bill Gates was one of the investors in the 2.3B first Silverlake Fund in 1999. Silver Lake Partners II was raised in 2004 with 3.6B, and in 2007 Silver Lake Partners III raised $9.6B in capital.

Do you know which of the Silverlake funds was the lead investor in Skype, or if it was a mix what the distribution was?


RE: How is this surprising?
By JasonMick on 5/18/11, Rating: -1
RE: How is this surprising?
By MrTeal on 5/18/2011 4:37:49 PM , Rating: 2
Which is fine, but from the images chosen, the captions on the images and some of article text, you definitely seem to be insinuating that Gates could be guilty of insider trading.


RE: How is this surprising?
By JasonMick on 5/18/11, Rating: 0
RE: How is this surprising?
By MrTeal on 5/18/2011 5:17:20 PM , Rating: 3
I disagree. You may say that it's important to reserve judgement and merely note this with interest, but when I look at DT's main page I see the following.
1) A picture from a movie of a man standing on a pile of money with the heading "Inside Job"
2) The title saying "Gates May Have Owned a Stake in Skype, Pressured MSFT to Buy"
3) A subheading that reads "Gates may have guaranteed himself a payday at the cost of $8.5B USD from Microsoft"

There's nothing wrong with the title of the article, but the image and subheading clearly imply wrongdoing.


RE: How is this surprising?
By ZmaxDP on 5/18/2011 7:22:54 PM , Rating: 2
I'll add another...

And he reveals that he orchestrated the acquisition, stating, "I was a strong proponent at the board level for the deal being done."

The quote does not in any way imply "orchestration". It implies agreement and support. To orchestrate or master-mind means he lead the efforts. Nothing in your article or referenced supports your claim of "orchestration".

Jason, whether you intended it or not, your editorial here clearly implies that he is guilty of some wrongdoing, though what wrongdoing is unclear. If, as you say, that was not your intent, then I would make some changes so that it more closely communicates what you desire us to interpret. As is, I don't know how anyone could read this without believing that you think he did something wrong...


RE: How is this surprising?
By nafhan on 5/18/2011 5:44:04 PM , Rating: 2
Unless you've got reason to believe that he bought significantly more of Skype just before this deal went down, then I really don't think there's an issue here.

In fact, timing and disclosure looks to be the big difference between this and the David Sokol case. Sokol bought the stock in Lubrizol mere weeks before the Berkshire buyout and DAYS before he started advocating the buyout within Berkshire. (probably) big difference.


RE: How is this surprising?
By JasonMick on 5/18/2011 5:52:07 PM , Rating: 2
quote:
Unless you've got reason to believe that he bought significantly more of Skype just before this deal went down, then I really don't think there's an issue here.

In fact, timing and disclosure looks to be the big difference between this and the David Sokol case. Sokol bought the stock in Lubrizol mere weeks before the Berkshire buyout and DAYS before he started advocating the buyout within Berkshire. (probably) big difference.


That's a valid point.

Granted the Skype partial acquisition by Silver Lake was in 2009, which Gates could in theory have played a role in. So it may be a little more recent than you suggest.

That said, I'm no legal expert, so I wouldn't begin to guess what the SEC would make of it if Gates did have a major stake acquired circa Sept. 2009, given that he pushed the current purchase.

But I agree the timing looks to be MORE in Gates favor than it was in Sokol's case....


magazine news
By geeg on 5/18/2011 4:17:45 PM , Rating: 1
with all due respect, this news belongs to a daily magazine about rich/famous people IMHO




RE: magazine news
By ddh on 5/18/2011 5:32:48 PM , Rating: 2
I agree this is portrayed in a highly sensationalistic way and is presented as if we are ready the National Enquirer, its a bit of an insult to readers since it is sorely lacking in facts.


RE: magazine news
By ddh on 5/18/2011 5:38:27 PM , Rating: 2
reading*


Conflict of Interest
By vgermax on 5/18/2011 4:25:16 PM , Rating: 2
If it's true, expect the SEC to launch an investigation into the deal. Simply, it's a gross conflict of interest and a disservice to the shareholders of MSFT. It's not too dissimilar to the recent scandal at Berkshire Hathaway involving Sokol and the purchase of Lubrizol. This is just more blatant. At least Sokol had the presence of mind to say he didn't influence the purchase of Lubrizol by Hathaway.




calls
By Shadowmaster625 on 5/18/2011 4:45:55 PM , Rating: 2
The question is, how many out-of-the-money call options did he own, directly or indirectly.




Bill Gates
By ajfink on 5/19/2011 9:19:37 AM , Rating: 2
Experienced executive, innovative thinker, tough negotiator, avid philanthropist who spends much of his time (and money) saving lives...

...Bill Gates for president?




By foolsgambit11 on 5/19/2011 9:47:53 AM , Rating: 2
In the future, could you clearly mark what has been updated in your articles? Or, even better, put the update at the bottom, preserving the original text in its entirety. Thanks.




Ballmer
By BailoutBenny on 5/19/2011 3:40:39 PM , Rating: 2
and the entire board should be fired by Microsoft stockholders, period. Under Ballmer's leadership, the stock has halved in price and stayed flat for a decade.

Microsoft spends more money in R&D than just about any other company on the planet and have NOTHING to show for that cash.

Ballmer continues his MBA taught methods of using accounting tricks to hide losses forward or backward to make the company look profitable but you can only erase and add columns for so long before someone says "Gotcha!"

The Xbox lost Microsoft almost 10 billion dollars. They are still hiding that loss! Zune, though great, was still a failure of execution. They allowed all of these great products to fail in their execution and ultimately cost billions instead of generating profits.

Ballmer failed to anticipate the iPod and he is underestimating the iPad now. Their iPad competing OS was shelved for 2 years because it was deemed non-important! Good luck after the multi-year head start you have given Apple Microsoft.

Microsoft management continues to pare down benefits for employees, the talent is still leaving in droves because management doesn't care and because of the culture. The culture is corrupt as ever with many groups not interested in inter-team cooperation.

The mergers and acquisitions since Ballmer has headed Microsoft are abysmal. Danger, FAST, Navision, etc. Now add Skype to that list. Billions lost on failed deals.

How Ballmer has been allowed to stay in his position, and how the board has not been ousted yet, is beyond me. I would have expected legal action to have started a long time ago from the shareholders.




By tayb on 5/18/2011 7:46:24 PM , Rating: 1
Bill Gates could probably buy a hundred thousand shares of every company in the world.




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