Four years after it acquired the Skype Internet telephone communications platform to support communications between its online buyers and sellers, eBay has agreed to sell a 65% stake in Skype Technologies S.A. for just over $2 billion to an investment group that will operate Skype as a standalone company. Analysts said the deal was a positive move for eBay, which will be able to better concentrate on its eBay.com marketplace and PayPal payments system while still sharing in the expected growth of Skype as a global communications platform.
"Skype is a strong standalone business, but it does not have synergies with our e-commerce and online payments businesses," says eBay CEO John Donahoe. "As a separate company, we believe that Skype will have the focus required to compete effectively in online voice and video communications and accelerate its growth momentum."
The investment group, headed by Silver Lake, a Menlo Park, CA-based technology investment firm, has agreed to pay eBay $1.9 million in cash plus $125 million in a promissory note in a transaction expected to close in the fourth quarter of this year. In addition to the 35% stake retained by eBay, the acquisition price places a total value on Skype of $2.75 billion, close to the $3.1 billion eBay paid for Skype in 2005, says Colin Sebastian, who covers e-commerce stocks as senior vice president of equity research at Lazard Capital Markets.
Although Skype has produced strong revenue growth—up 25% year over year in the second quarter ended June 30, to $170 million, after rising 44% year over year to $551 million in 2008—Skype never took off as a tool widely used by eBay.com buyers and sellers and produced relatively low profit margins compared to the rest of eBay, Sebastian says. "Skype was growing faster than eBay overall, but also at lower margins, so it was a mixed bag for eBay's financial impact," he says.
Skype had 405 million users as of the end of 2008, mostly outside of the U.S., with revenue per-user for the year of less than $1.50.
Scot Wingo, CEO of ChannelAdvisor Corp., which helps retailers connect to eBay.com and other e-marketplaces, notes most users of eBay in the U.S. are more likely to use a conventional phone to call an eBay seller's 800 number than click a Skype button and talk via their computer.
"Many times eBay sellers don't want to be contacted," he adds. "Especially for items in the less-than $100 range, one phone call can destroy an eBay seller's already very thin margins. Most eBay sellers tend to avoid the addition of customer service reps whenever possible."
EBay, meantime, is under pressure to improve its core e-marketplace business and continue the growth of PayPal amid a highly competitive payments market, says Sucharita Mulpuru, principal analyst for retail e-business at research and advisory firm Forrester Research Inc. "There's so much competition encroaching on PayPal, eBay's crown jewel, that eBay needs to have all hands on deck," she says.
Sebastian adds that focusing more on its e-marketplace and payments businesses will help eBay score better on Wall Street. "As part of our justification for upgrading shares of eBay earlier this year, we anticipated that a spin-off of Skype would position eBay more clearly with investors as a leading Internet platform for e-commerce and payments, along with a fast growing classified advertising business," he says.
In April of this year, eBay announced plans to separate Skype from the company and considered filing for an initial public offering of Skype stock next year, but chose to sell a majority stake instead, Donahoe says. "This deal achieves our goal of delivering short- and long-term value to eBay and its stockholders, without the possible delays and market risk of an IPO," he says. "Selling Skype now at this great valuation, while retaining an equity stake, makes sense for the company. And it allows us to focus all of our energies on the opportunities in front of PayPal and eBay."
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