Ebay: We paid too much for Skype

 

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By Barry Collins and Reuters

Posted on 2 Oct 2007 at 10:00

Online auction house Ebay has admitted that it massively overpaid for the internet telephony service, Skype.

Ebay says it will cut as much as $1.2 billion off the $4.3 billion potential price it agreed to pay for Skype two years ago.

The writedown on the value of the deal came as Ebay announced Skype co-founders Niklas Zennstrom and Janus Friis had resigned as executives, and marks a tacit admission of poor returns from Skype.

EBay says it will pay Zennstrom, Friis and other Skype shareholders 375 million euros ($530 million) and take a charge of $1.4 billion against Ebay's third-quarter results, due out later this month.

"I think this is a testament that the Skype franchise is not worth as much as Ebay originally thought," says Wall Street analyst Youssef Squali of brokerage Jeffries & Co.

Ebay's deal to acquire Skype was controversial with investors from the start. A key justification of the deal was Ebay's hope to stoke growth in its core auction business, which has slowed in recent years, and by call-billing payment tie-ins between Skype and Ebay's PayPal online payments service.

Skype has also struggled to convince customers to sign-up for the pay-for elements of its service, such as calls to landlines and voicemail.

The returns to Ebay on the Skype deal, the largest internet transaction since the technology stock downturn of 2000, contrast sharply with the $580 million Rupert Murdoch paid to acquire MySpace two months ahead of the Ebay-Skype deal.

For while Skype has failed to live up to expectations, generating only $90 million in revenue in the most recent quarter ended in June, Murdoch recently said he would be surprised if market-leading social network MySpace failed to deliver $1 billion over the course of the fiscal year ending June 2008.

Big money deal

In September 2005, Ebay agreed to pay $2.6 billion for Skype and make further payments over three years of up to $1.7 billion based on Skype meeting targets for growth in users, revenue and profit targets.

Ebay said on Monday it may pay Skype shareholders a further 138.4 million euros, or about $195.2 million, but only if Ebay sells 50 percent or more of Skype by the end of March 2008.

Skype reported its second quarterly profit in a row in the second quarter, with 220 million registered users. But Ebay CEO Meg Whitman told investors she was not happy with the results.

The Skype writedown casts a black cloud over an otherwise healthy business. "If you take Skype out of the equation, the rest of the Ebay business seems to be doing great again," says Steve Weinstein, analyst at Pacific Crest Securities. "Ebay management has found ways to re-accelerate the core (auctions) market. Lots of its businesses are doing extremely well."

Zennstrom will now spend more time on new projects and will become Skype's non-executive chairman. He founded online video startup Joost.com together with Friis after the Skype sale. The two are well-known Swedish entrepreneurs and active investors in European Web startups.

Ebay's chief strategy officer, Michael van Swaaij, will act as Skype CEO until it finds a permanent successor to Zennstrom.