Tuesday, April 14, 2009 2 comments ++[ CLICK TO COMMENT ]++

How to lose $1.4 billion in 4 years... the Ebay story

It seemed like a dumb move at that time--if I had a blog at that time, I would have said it--and it turns out to have been a dumb move after all. Ebay acquired Skype a few years ago and many analysts were scratching their heads at that time. Now, however, I doubt those analysts are left wondering after Ebay announced it was spinning off Skype:

EBay Inc. said Tuesday that it plans to separate its Skype unit through an initial public offering, agreeing to break out the Internet-telephony service it bought for a controversial $2.6 billion three and a half years ago.

EBay had been evaluating options for Skype, which it bought in late 2005 but has struggled to fit into its online-auctions and payments businesses. The company is under pressure from investors to revive its core business, and is shedding efforts that are not central to that effort.


In a statement, eBay said it will separate Skype "beginning with an initial public offering" that will be completed sometime by the first half of next year. Specific timing of the IPO would depend on market conditions, it added.

It wrote down the $2.6 billion acquisition down to $1.2 billion in 2007 and it is likely worth even less now. Some analysts think Skype is worth as much as $5 billion but it remains to be seen. The public market may place a high multiple on Skype but I am doubtful it can maintain it.

On the positive, Ebay was worth more than $40 billion a few years ago, and is worth $18 billion now, so this isn't a big hit to shareholders (it's roughly 2x their yearly earnings.) It's not as bad as some mining firms who gambled their whole company on risky takeovers at potentially multi-decade peak prices* in the last few years.

(* that is, if you are bearish on commodities and think a peak has been set ;) )


2 Response to How to lose $1.4 billion in 4 years... the Ebay story

April 14, 2009 at 9:29 PM

I wrote about the deal here http://longterm.blogspot.com/2005/09/ebay-buying-skype.html 
"All three of my options really concern me because either Whitman has purchased a network that is unlikely to benefit her current network, a technology for 100x replacement cost or an investment in a business she almost certainly doesn't understand (because her core competency is the ebay business which she has run BRILLIANTLY) and is trending towards free. If it is really being held as an investment she should have just returned the money to shareholders instead of thinking she has a better use for all that cash."
..."This smells like a desperate attempt to generate buzz at huge cost."

April 14, 2009 at 9:38 PM

Looks like you nailed it... The thing I never could figure out was why Skype of all things. Its future was dependent on communications, which seemed to have nothing to do with Ebay. It was such a bizarre deal...

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