EBay to sell stake in Skype for $2B, reverses puzzling 2005 acquisition of telecom service

Tuesday, September 1, 2009

EBay to sell part of telecom service Skype for $2B

NEW YORK — EBay Inc. is trading control of the online telecommunications service Skype for about $2 billion, reversing a 2005 acquisition that many analysts considered a head scratcher from the beginning.

The company famous for its online marketplace said Tuesday it is selling a 65 percent stake in the business to a group of private investment funds for $1.9 billion in cash and a $125 million note, while retaining a 35 percent stake.

EBay said the deal values the company at $2.75 billion.

EBay said earlier this year that it would spin off Skype, which lets people make free or cheap voice and video calls on computers and cell phones, after struggling to justify its 2005 acquisition of the company for $2.6 billion.

EBay hoped the service would catch on with users of its auction site, but it never became a popular way for buyers and sellers to connect. The company took a $900 million write-down on Skype in 2007, tacitly acknowledging it had overvalued the business.

Still, Skype itself remains popular, particularly among people who regularly make international calls. According to the research group TeleGeography, Skype accounted for 8 percent of international calling traffic last year. The service can typically offer cheaper rates than regular phones by sending voice data over the Internet just like e-mail and Web pages, reducing the need to tie up dedicated phone lines.

It is also starting to look like a more profitable business, with revenue up 25 percent to $170 million in the most recent quarter.

“We think Skype definitely is a viable stand-alone business,” Lazard Capital Markets analyst Colin Sebastian said. “It has clear market-share leadership and the margins have turned positive.”

For eBay, though, “Skype has been a distraction,” Sebastian said. “This allows them to focus on turning around the core marketplace.”

Skype was founded by Niklas Zennstrom and Janus Friis, creators of the music downloading service Kazaa, which had riled the recording industry.

EBay announced in April that it would spin off Skype through an initial public offering next year, though the company said it was open to alternative bids that offered attractive valuation. In an interview Tuesday, eBay CEO John Donahoe said the deal with the investor group achieves that.

“This deal is a real win, win, win,” he said, as it lets eBay’s management focus on its marketplace and PayPal online payments businesses, while allowing eBay shareholders to keep a stake in Skype’s future success. It also gives Skype an ownership team that “believes passionately” in its future, he said.

He also said that for Skype, being a standalone company “maximizes its likelihood of success.”

The group of investors buying the stake includes Andreessen Horowitz, the new $300 million fund set up by Web browser pioneer Marc Andreessen. Led by the private equity firm Silver Lake, the group also includes Index Ventures and the Canada Pension Plan Investment Board.

EBay expects the deal to close in the fourth quarter of this year.

Shares in the San Jose-based company fell 53 cents, or 2.4 percent, to $21.61 in midday trading after rising earlier Tuesday following the announcement.

AP Technology Writer Rachel Metz in San Francisco contributed to this story.

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