The drama began late last week after a Wall Street Journal article cited unnamed sources claiming that eBay and Skype were in discussions over a $2 billion to $3 billion price tag for Skype. Previous reports said the company was also holding acquisition talks with Microsoft and Yahoo! Yet just a week ago, Skype categorically told reporters that it wasn’t for sale.
Now, under the terms of the deal, the $2.6 billion purchase price could increase by a further $1.5 billion to $4.1 billion, based on the performance of Skype over the next three years. The initial $2.6 billion consists of $1.3 billion in cash and 32.4 million shares. The purchase of Luxembourg-based Skype is expected to cut eBay’s 2006 earnings per share by $0.12 cents and add to profit in 2007, eBay CFO Rajiv Dutta said in a conference call. The deal is expected to close in the fourth quarter of this year.
In an attempt to explain the rationale for the deal, eBay CEO Meg Whitman said the communication option will act as a growth engine for e-commerce, and therefore the acquisition is a natural fit. Just as in the same way that eBay saw an increase in business after it purchased online payment company PayPal for $1.5 billion in 2002, so the acquisition of Skype will accelerate communications, and hence e-commerce on eBay, she said. Voice is the most natural way to communicate, and working with PayPal and eBay, we cannot think of a more powerful platform to deliver, said Skype’s co-founder Niklas Zennstrom.
The idea is that Skype will be able to provide eBay with a click-to-talk voice capability for its online sellers and buyers in order to replace email as the normal communication method between the two. It will also provide eBay with new markets, for example by allowing an online phone feature on its website using Skype technology that would allow businesses to receive calls or leads from eBay users for a fee. Ms Whitman highlighted an example of selling a car on eBay. The ability to verbally ask the seller specific questions about the product means that the entire e-commerce process will speed up when compared to the current method of exchanging email, she argued.
It ultimately comes down to whether eBay can justify paying $2.6 billion for a company with revenue, this year, in the tens of millions and a bottom line in the red, in a business that is not immediately contiguous to its own. Something of a leap of faith, perhaps. Certainly the stock markets greeted the news with skepticism and shares in eBay fell 0.31% to $38.50 in early trading on Nasdaq on Monday morning.
While arguments about the logic of the deal continue, there is little doubt that Skype does offer huge potential. Commenting on the purchase price, eBay CFO Mr Dutta confirmed that deals like Skype did not come along very often. He said eBay had assessed the purchase price based on a number of factors including the expected future earnings from Skype, the valuation of other internet acquisitions, and the number of Skype users.
Skype is an impressive performer on paper. Founded in 2003 by Swede Niklas Zennstrom and Dane Janus Friis, the two employed the same Estonian programmers who created the calling software to build Kazaa, the Napster-like software that shook the entertainment industry by letting people share music and video files.
In 2004 Skype had revenue of only $7 million, but this year it is expected to bring in $60 million, and more than $200 million in 2006. It currently offers free calls to everyone on the Skype network, and only charges for calls from computers to mobile phones or traditional fixed lines.
The company is headquartered in Luxembourg, but is run out of its London, UK office. It boasts an impressive 151 million downloads of the software plus an active on-net user base of 54 million people, and 2 million premium customers taking paying services such as SkypeOut (PSTN break-out) and SkypeIn (a phone number that can be called from regular phones). The company is attracting 150,000 new users per day, and is expected to have a customer base of 57 million by the end of the quarter.
Skype has received relatively little funding to date – just $18.8 million last year. Compare this to a competitor such as Vonage Holdings, which is one of the leading providers of voice over IP services to American homes. Vonage is reportedly planning to raise $600 million via an initial public offering, and also has so far received a staggering amount of venture capital financing, thought to be $408 million. However, Vonage is estimated to have only 800,000 customers. Skype is adding a Vonage every week, said Ms Whitman.
Despite this, Skype has a small footprint in the North American market, a situation that it claims is changing, though the company does not provide a geographic breakdown of its user base. It also faces significant challenges from a number of industry giants such as Google, AOL, Microsoft, and Yahoo!, all of which have VoIP strategies of their own. However, Skype is very strong in markets such as the Nordic region and Japan. In the UK, there is talk of 8,000 new downloads a day of the client.
Skype had 130 employees at the end of May, and has been struggling recently with customer-support problems. On the other hand, eBay is a well-established company with a market cap of $52.3 billion. It will be able to bring significant resources to help Skype iron out any operational niggles.
