Update: EBay reaches deal to sell Skype

It's selling a 65% stake in the company for $1.9B

EBay has reached an agreement to sell a 65% stake in its Skype Internet telephony, video conferencing and instant messaging unit for $1.9 billion in cash to an investor group led by Silver Lake.

In addition, eBay will receive a note in the principal amount of $125 million from the buyers, which also include Index Ventures, Andreessen Horowitz and the Canada Pension Plan Investment Board, the company said Tuesday.

The deal, which isn't subject to financing conditions and is expected to close in this year's fourth quarter, puts Skype's value at $2.75 billion.

In April, eBay announced its intention to spin off Skype, saying the Internet telephony unit didn't mesh with eBay's two core businesses: its e-commerce marketplace and its PayPal online payment division.

At the time, eBay said it planned to launch an initial public offering (IPO) for Skype, probably in the first half of 2010, but that the nature of the spin-off and its timing could vary depending on market conditions.

The deal struck with Silver Lake and the other investors is a better alternative, eBay President and CEO John Donahoe said in a statement. "This deal achieves our goal of delivering short- and long-term value to eBay and its stockholders, without the possible delays and market risk of an IPO," Donahoe said. "Selling Skype now at this great valuation, while retaining an equity stake, makes sense for the company."

By giving up majority ownership of Skype, eBay fades into the background of Skype's future. This isn't what eBay had in mind when it paid $2.6 billion to buy Skype in October 2005. Back then, the plan was to mesh Skype with the eBay marketplace to boost communications and commerce between merchants and buyers. That vision never became a reality, and two years after the acquisition, eBay wrote down Skype's value by $1.4 billion.

In order to realize its potential for growth, Skype needs to be an independent business, according to Donahoe. "As a separate company, we believe that Skype will have the focus required to compete effectively in online voice and video communications and accelerate its growth momentum," Donahoe said in the statement.

Egon Durban, Silver Lake's managing director, said that the new majority owners, with their technological and business development experience, will help Skype accelerate its growth.

Silver Lake is an investment firm that focuses on the technology field. The list of companies it invests or has invested in includes Ameritrade, Business Objects, Travelocity and Seagate Technology. Index Ventures invests in technology, bio-technology and clean technology and its current and past investments include Playfish, Weatherbill, MySQL and Last.fm. It was an original backer and owner of Skype. Andreessen Horowitz was created in June of this year by former Netscape wonderboy Marc Andreessen and Ben Horowitz.

EBay didn't address in its statement the legal squabble over access to Skype's peer-to-peer technology. In July, eBay said it was developing an alternative to the technology currently used by Skype because licensing talks with the owner of the technology had broken down.

When eBay bought Skype, the deal didn't include the technology used to run the VoIP (voice over Internet Protocol) service. That technology is owned by a company called Joltid, which licenses the technology to Skype.

Skype brought Joltid to a U.K. court earlier this year in a bid to resolve the licensing dispute, which led Joltid to terminate the licensing agreement.

"Joltid has alleged that Skype should not possess, use or modify certain software source code and that, by doing so, and by disclosing such code in certain U.S. patent cases pursuant to orders from U.S. courts, Skype has breached the license agreement," eBay said in a U.S. Securities and Exchange Commission filing in July.

Skype responded to Joltid's move to terminate the license by asking the court to declare the termination was invalid. The court case is due to be heard in June 2010.

EBay is struggling to jump-start growth in its online marketplace, as it faces increased competition from Amazon.com and other rivals, and deals with the effects of the economic slump on online sales.

For its second quarter ended June 30, eBay's revenue fell almost $100 million to $2.10 billion year-on-year, mostly due to its core online marketplace business, since both PayPal and Skype posted revenue increases.

The marketplaces business unit, which includes eBay, Shopping.com, StubHub, Kijiji and other e-commerce sites, generated $1.26 billion in revenue, down 14% year-over-year.

In contrast, Skype had $170 million in revenue for the quarter, up 25% year-on-year. It ended the quarter with more than 480.5 million registered users. Skype had revenue of $551 million in 2008, up 44% compared with 2007.

Although eBay had net income $327.3 million, or $0.25 per share, operating margin decreased to 19.6% for the quarter, compared to 24.8% in 2008's second quarter.

In March, Donahoe outlined a three-year plan for growth, telling financial analysts that the eBay marketplace "hasn't kept up with competition, nor customer needs."

In April, eBay announced the sale of StumbleUpon, which it acquired in 2007, saying that it too lacks "synergies" with eBay's core business. That month eBay also said it would begin taking a more hands-on approach to solving disputes between merchants and sellers, a departure from its laissez-faire philosophy in an attempt to make eBay more attractive to a broader audience of shoppers who consider the site's buying experience today too risky and chaotic.

Copyright © 2009 IDG Communications, Inc.

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