eBay sells Skype Stake to Private Investors for $2.75 Billion

We earlier saw How Skype eBay Dispute could Finish Skype. After all the Dispute between Skype’s Parent company and eBay, this had to end this way.
Most of Internet phone unit is sold for $2.75 billion to a group of private investors, including Netscape founder’s new venture capital firm.
eBay announced a deal Tuesday to sell its Skype online calling service to a group of private investors, led by the Silicon Valley private equity firm Silver Lake Partners.

The buyers will pay eBay $1.9 billion in cash, which includes a loan from eBay of $125 million, for 65 percent of the company. EBay will retain 35 percent equity investment in Skype, which is on track to take in more than $600 million in revenue this year.

The deal values Skype at $2.75 billion, higher than many analysts had expected for the calling service. Many analysts thought eBay grossly overpaid when it acquired Skype in 2005 for $2.1 billion.
This deal comes during a very public battle between eBay and the founders of Skype, who are threatening to cut off one of the key peer-to-peer technologies that power and have expressed interest in rebuying their company. It’s even possible they are also part of the sale – we just don’t know yet.

In addition, the buyer group also includes Andreessen Horowitz, a new venture capital firm headed by the former Netscape co-founder, Marc Andreessen; Index Ventures, a London-based venture capital firm that was an early investor in Skype; and the Canada Pension Plan Investment Board.

“This is a great deal, unlocking both immediate and long-term value for eBay and tremendous potential for Skype,” John J. Donahoe, eBay’s chief executive, said in a statement. “We’ve acted decisively on a deal that delivers a high valuation, gives us significant cash up front and lets us retain a meaningful minority stake with talented partners.”

“Skype is a strong stand-alone business, but it does not have synergies with our e-commerce and online payments businesses,” Mr. Donahoe added. “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.”

History & Facts

eBay acquired Skype in 2005 in a deal that has come to be viewed as one of the most awkward technology pairings of the decade. Meg Whitman (CEO then) led the charge to acquire Skype for $2.1 billion plus bonus incentives for Skype’s shareholders that later increased the price past $3 billion.

Ms. Whitman paid a hefty premium to outbid Google, which she viewed at the time as invading eBay’s core businesses of e-commerce and payments. But Google’s forays into those areas, like the Google Checkout service, have met with less success than once forecast.

As part of the deal, Ms. Whitman also allowed Skype’s founders, Niklas Zennstrom and Janus Friis, to maintain ownership of the core peer-to-peer technology behind the Skype service. The founders invested that ownership into a separate company, called Joltid, which is now battling eBay in a British court over rights to make changes to that technology.

At the time, Ms. Whitman said the deal with worth it because Skype’s calling capabilities could be woven into the eBay marketplace, allowing buyers and sellers to facilitate their purchases. But those synergies never materialized and in 2007, eBay wrote down $1.4 million of the acquisition.

Ms. Whitman, who left eBay last year, is now a Republican candidate for the governor of California.

“The purchase was a serious mistake by Meg Whitman. It was an attempt to buy growth which investors saw through instantly,” said Jeffrey Lindsay, an analyst at Sanford C. Bernstein. But, Mr. Lindsay said, the new deal surpassed his expectations for what Skype could generate in the initial public offering that eBay had once planned for 2010. “I think investors will be really happy with this.”

Although eBay has said it was planning an initial public offering for the Skype division in 2010, it has been talking to various companies and investment groups interested in buying the service. Mr. Zennstrom and Mr. Friis approached private equity firms earlier this year in hopes of making a bid for their old firm but did not meet eBay’s price.

Last month, eBay also negotiated with Google over buying Skype, according to a person briefed on those discussions. But Google ultimately walked away from a potential deal, fearing that continued litigation could leave it vulnerable to huge damages.

Google also worried that owning Skype might alienate wireless carriers, who offer their customers phones running Google’s Android software, the person said.

After falling precipitously the last few years, eBay’s shares have jumped 53 percent this year on strength in its PayPal payments business and positive changes in its core auctions business, including improved usability of the site and more “buy it now” auctions.

In early trading on Tuesday, eBay’s shares were up about 1.4 percent, to $2.45.

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