EBay To Buy Skype For $2.6 Billion In Cash, Stock"
NEW YORK -(Dow Jones)- Seeking to enhance its core e-commerce business while venturing into a fast-growing segment of the communications field, eBay Inc. (EBAY) said Monday it will acquire Luxembourg-based Skype Technologies SA (SKYPE.YY).
Following several days of speculation that a deal was in the offing, the San Jose, Calif., online auction company confirmed that it has agreed to purchase Skype, a privately held Internet communications company with 54 million customers around the globe.
In a press release Monday, EBay said will pay about $2.6 billion, split evenly between cash and eBay stock, and could also pay up to $1.5 billion more, in 2008 or 2009, in performance-based incentives.
"The acquisition will strengthen eBay's global marketplace and payments platform, while opening several news lines of business and creating significant new monetization opportunities for the company," eBay said in a press release.
EBay has been expanding geographically but, outside of a handful of small acquisitions, hasn't ventured much outside of the online auction business. The purchase of Skype represents a big step in a new direction, causing concern among many investors.
Since news of a potential deal surfaced last Thursday, market participants have questioned the strategic value of acquiring Skype - particularly for such a high price tag - and expressed concern about the potential for dilution of the company's shares. EBay's shares fell a cumulative 4.5% the last two sessions, ending Friday at $38.62 on the Nasdaq Stock Market. The stock is down from near $60 at the start of the year.
EBay said the acquisition, which is expected to close in the fourth quarter, should be dilutive to pro forma and GAAP earnings per share in the fourth quarter by one cent and four cents, respectively. For all of 2006, the acquisition is expected to be dilutive by four and 12 cents, respectively, with break-even on a pro forma basis likely by the fourth quarter of next year, eBay said in the release.
Skype, which was launched in 2003, generated $7 million in revenue last year. Skype expects the figure to rise to $60 million this year and to $200 million in 2006. EBay expects Skype to have operating margins in the range of 20-25% in the long term.
Enhance And Diversify
With Skype, eBay is gaining control of a company that claims to be adding 150,000 users each day. Skype's software allows users to make free, unlimited calls over the Internet to others who have the service, and to make low-cost calls to landline and mobile phones. The Internet calling services provided by Skype, and others like it, pose an increasing threat to traditional telecommunications service providers.
According to Rajiv Dutta, chief financial officer at eBay, the company is seeking both to enhance its core online business and diversify into an area that has significant growth potential.
"This is really about e-commerce, but it's also about building what is going to be a big communications business," Dutta said in a phone interview, noting that it is similar to the strategy adopted when eBay acquired the PayPal electronic payments system in 2002.
With Skype, Dutta noted, eBay will be able to collect new fees related to e-commerce communications, as well as improve the speed and general ease of closing transactions - particularly more complicated ones such as those for cars and high-end collectibles - by making it easier for buyers and sellers to communicate.
It will also allow eBay to tap into a new pool of customers. Skype has a strong presence in locations where eBay does not, Dutta said, citing Eastern Europe, Scandinavia and Japan. The deal will also give eBay a larger presence in emerging markets, such as China, India and Russia, where there are growing numbers of Skype users.
Among the ways that eBay hopes to generate extra revenue with the acquisition, the company said in the press release that a PayPal account associated with each Skype account could make it easier for users to pay for Skype's fee-based services. That would add to the number of PayPal accounts and increase payment volume.
Skype Considered Various Options
Skype had become a hot property over the last several months, with the likes of News Corp. (NWS), Microsoft Corp. (MSFT) and Yahoo Inc. (YHOO) said to have been interested in acquiring it.
Skype's director of operations, Michael Jackson, said that Skype did evaluate various options, but didn't specify which companies were involved in discussions. He said that eBay had approached Skype initially, and that the deal had been in the works for several months.
"Various different models were under discussion," Jackson said in a phone interview. "We evaluated all the different options and found eBay to be the best fit," he added, citing their mutual commercial interests and corporate cultures.
Under the deal, Skype will remain a stand-alone business unit in the eBay group. Skype's co-founders, Niklas Zennstrom and Janus Friis, will continue in their roles as chief executive and head of strategy, respectively, at the Internet telephony unit. Zennstrom will report to eBay CEO Meg Whitman and will join eBay's senior executive team.
Skype management has plenty of incentive to maintain the momentum it has generated in recent years, with up to $1.5 billion riding on it for Skype shareholders if targets on active users, gross profit and revenue are met.
According to the press release, shareholders representing 60% of Skype shares opted for lower upfront payment in cash and stock and the possible payments related to performance at a later date.
Dutta, the eBay CFO, said that the incentives component of the deal is ideal for the company, noting that eBay will gain significant value if Skype overachieves and that it immediately involves Skype managers in growing the business.
-By Stephen Wisnefski and Desiree Hanford, Dow Jones Newswires; (312) 750 4142; stephen wisnefski@dowjones.com
(END) Dow Jones Newswires"
Posted to the site on 12th September 2005
