All you 480 million Skype users out there should be rejoicing today, now that the Internet calling and video service has been freed from the clutches of eBay.
As was announced this morning, eBay is selling a 65% stake in Skype for $1.9 billion in cash to a group of private equity shops and venture capitalists. The deal also includes a loan from eBay of $125 million.
So let’s call it $2 billion. That’s about what eBay CEO John Donahoe said he thought Skype was worth when he announced in April that he was looking to take Skype public. Both the intention to spin Skype out (or sell it), and the price tag were points of data that investors have had months to digest. That is why eBay investors reacted fairly calmly today. This wasn’t a surprise - good or bad - and the market reflected it. Shares of eBay (EBAY) were down about 2% on the news.
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The question some eBay investors may have is whether Donahoe got far less for Skype today, rather than waiting for an IPO tomorrow? The short answer is not a satisfactory one: maybe, maybe not. Are valuations low today? Yes, but they are better than they were six months ago, and there is no guarantee that six months from now they will be better, or that Skype could get a warm welcome in the public markets. As soon as Donahoe announced his plans to take Skype public the for-sale sign also went up. The sale happened first.
Clearly the investors in the deal -- which include Silver Lake, newly-formed venture capital fund Andreessen Horowitz (a source close to the deal says Andreessen Horowitz put up their fund’s maximum $50 million), London-based venture capital firm Index Ventures and the Canada Pension Plan -- have their own designs for a payday which likely includes an IPO at some point in the future.
What would have made an eBay IPO of Skype in the near-term almost impossible, is that Skype's founders Niklas Zennstrom and Janus Friis, who left the day-to-day operations of the company in 2008, are currently suing eBay over the use by Skype of a key bit of technology they still own. The case, which is based in a London court, isn’t due to be heard until June 2010. Without a resolution to the lawsuit and/or a satisfactory replacement technology cooked up by Skype, there wasn’t going to be an IPO.
Moving Skype into private hands, lessens the leverage that Zennstrom and Friis had when they were essentially holding the IPO hostage. Expect a speedier, perhaps easier resolution to the case now, especially since Index Ventures, one of the early Skype investors, is a frequent co-investor with Zennstrom and Friis in their own venture capital forays. But don’t expect an IPO anytime soon, that is not going to be on the front-burner for a while.
Why Skype users should be happy is that eBay didn’t screw the company up during its stewardship. Forget the talk of “synergies” that then eBay CEO Meg Whitman spouted when she paid $2.1 billion in 2005 for Skype (plus payouts that ballooned the deal to north of $3 billion). There was never any synergy. To eBay’s credit, it didn’t try to force them, and create one bad company out of two good ones.
Skype, which in on track to post $600 million in revenue this year, is still a growth machine - especially under the stewardship of new CEO Josh Silverman. Silverman will continue in that role, according to comments by Skype’s new owners. And while eBay didn’t ruin Skype, there is reason to believe that as an independent company Skype might be able to run faster and farther than it could from within eBay - Skype that to your buddies.
In that case, eBay investors also benefit, because the company still has a 35% stake in Skype, and presumably a board seat. If Netscape founder Marc Andreessen (who also sits on the eBay board) and the new owners can turbo-charge Skype as it comes up against increasing competition, most notably from Google (GOOG), they may be able to unlock growth and value that eBay simply couldn’t. Maybe they won’t be able to, but that is certainly their plan.
In the meantime, eBay will get to bank $1.9 billion in cash, and focus its efforts on reviving its core auction business. Skype will have to grow up and, if possible, go public without eBay, which was the way it always should have been.