By Eric Auchard
EBay Inc. has agreed to buy the fast-growing Internet start-up Skype
in a move to add free Web telephone calls to its online auctions and
fuel growth, the companies confirmed on Monday.
EBay said it plans to pay $1.3 billion in cash and $1.3 billion in
stock for the Web communications company. It would make a further
payout of up to $1.5 billion by 2008 or 2009 if financial targets are
met, giving the deal a total value of up to $4.1 billion, executives
of the two companies said.
EBay is renowned for an Internet business model linking millions of
buyers and sellers, but its core U.S. market is maturing, slowing to
annual growth of between 20 percent and 30 percent a year, compared
with 50 percent international growth.
Skype, which said it expects revenue of $60 million this year and more
than $200 million in 2006, has raced to the lead in the booming
voice-over-Internet (VOIP) market, which is being aggressively
targeted by online powerhouses like Yahoo, Google and Microsoft.
In just two years, Skype has attracted 54 million members to its free
Internet-based voice service and is on pace to roughly double in size
within a year.
Skype, whose software allows consumers to make free or low-cost phone
calls anywhere in the world via the Internet, would be the biggest
acquisition so far for 10-year-old eBay.
"We are really buying a new business," eBay Chief Financial Officer
Rajiv Dutta said in a phone interview.
He drew parallels to eBay's expansion into online payments with its
$1.5 billion acquisition in 2002 of PayPal, which drew initial
criticism as a bid to compete in the banking business but thrust eBay
into the lead of the online-payment market.
CORE BUSINESS
"Is eBay diverting from its core business?" Dutta asked of Skype.
"Nothing could be further from the truth."
PayPal is on track for $1 billion in sales in 2005, Dutta noted. "We
see the same kind of opportunity here with Skype."
Luxembourg-based Skype offers a free service when users make
computer-to-computer calls to other Skype users. Charges apply when
Skype users make calls to regular phone numbers.
But in a move to strengthen the bonds between eBay buyers and sellers,
the company will also encourage eBay merchant sites to use Skype
software to allow customers with last-minute sales questions to click
to talk to a customer service agent.
Executives of the two companies justified the combination by saying
that the power of so-called "click-to-call" services to convert
shoppers into buyers represents a far more lucrative form of selling
proposition than advertising can. Skype also plans to add video
calling and other features to its software.
"Once we integrate communications into e-commerce, we think that
(Skype) is going to remove considerable friction" from the buying and
selling process, Dutta said.
Nearly half Skype's users live in Europe, a quarter are in Asia and an
eighth are in North America, providing eBay with a large immediate
audience as it seeks to expand outside of its core North America
market where rapid growth is stabilizing.
The deal is expected to complete in the fourth quarter.
Skype expects to generate $60 million in revenue this year and more
than $200 million during 2006, Skype's Chief Operating Officer Michael
Jackson said in a joint interview with Dutta. The company has yet to
post a profit, he said, adding that business users account for 25
percent of Skype's audience.
The acquisition will cut eBay's earnings by a penny per share in each
quarter until the end of 2006 before it begins to positively
contribute to eBay's profitability, Dutta said.
VALUE CREATION
EBay must convince analysts and investors that the deal is necessary
to stoke new streams of revenue growth and is worth the
multibillion-dollar price paid.
"We have some very high goals ... related to active users, gross
profits and revenue," Dutta said. "(The goals) would translate into
very significant value creation for eBay," he added, though he
declined to spell out the targets.
While allowing potential benefits from providing communications
services between buyers and sellers, particularly in China, Goldman
Sachs analyst Anthony Noto said in a note to clients on Friday that a
licensing partnership could accomplish this without requiring eBay buy
Skype.
"We struggle to see enough of a benefit to the marketplace from offering
this service to get a sufficient return on a potential
multibillion-dollar price tag," Noto wrote.
As of October 2004, Skype had raised $24 million from several private
equity firms including Mangrove Capital Partners, Draper Fisher
Jurvetson, Bessemer Venture Partners and Index Ventures.
"It may be that all the pieces add up for eBay into a new line of
business," Kelsey Group analyst Greg Sterling said in an interview
before the merger was confirmed. "It really seems like a big departure
for eBay."
(Additional reporting by Adam Pasick and Kirstin Ridley in London).
Copyright 2005 Reuters Limited.
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Eric Auchard (reuters@telecom-digest.org)