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October 1, 2007

Skype: CEO Zennstrom Steps Down; Only 1/3 of Earnout Paid

Michael Arrington

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skype_logo.jpgSkype (acquired by eBay in late 2005) announced today that co-founder and CEO Niklas Zennstrom will step down, retaining his role as chairman (which doesn’t mean much for a subsidiary of a public company). Andy Abramson says this is a sign that eBay isn’t happy with the way Skype has been run to date. He also speculates that it may be spun off at some point into a free standing public entity. I wouldn’t be surprised to see that happen.

More interesting is the news that the earnout in the transaction, which could have amounted to $1.7 billion, was settled for just 1/3 of that possible total, or $530 million. The earnout was to be based on specific active user, revenue and gross profit targets that were to be achieved in 2008 and the first half of 2009. It’s clear those objectives are not being met.

eBay is taking a financial statement write-off of around $1.5 billion in connection with the transaction. Analyst Henry Blodget calls the eBay - Skype merger a failure based on the performance of the deal to date. That may or may not be the case for eBay; but for Skype’s stockholders it was most definitely a big win.

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This entry was posted on Monday, October 1st, 2007 at 9:01 am and is filed under Company & Product Profiles. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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Comments

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  1. Koby

    October 1st, 2007 at 9:35 am

    I find this interesting. Skype is a great service, but I honestly do not feel that it has perfected its place in its niche. Sure it has a lot of users, but I think that it is still trying to find its way overall. And with the eBay merger, it seems things are going to take a little longer to get where they probably need to be.

  2. James Thomas

    October 1st, 2007 at 9:39 am

    Not much you can say about that… IMO skype is a good platform on it’s own, growing at it’s own pace and paying for itself. 1.7 billion is a bit liberal with the valuation…

    Tell me you wouldn’t just take your money and run if you were this guy, though…

  3. Marc Fiszman

    October 1st, 2007 at 9:46 am

    Always struck us as one of the weirder deals out there. The “synergies” were tenuous at best.

  4. Eric

    October 1st, 2007 at 9:49 am

    Wow… who would have thought that a $4.7 Billion acquisition of a product whose revenue is only a tiny fraction of that, and having nothing to do with your core business, could possibly go awry?

  5. chris

    October 1st, 2007 at 10:12 am

    Congratulations to Jaan Tallinn and all the other Estonians for showing that Silicon Valley is not the epicenter of the tech universe and for outsmarting Ebay.

    Skype, Broadcast.com, Geocities, Bluemountain.com … always better to be a seller than a buyer in this game. Anyone stupid enough to buy Facebook should take note.

  6. Francisco

    October 1st, 2007 at 10:40 am

    I never understood that acquisition…

  7. Andrew

    October 1st, 2007 at 11:02 am

    Saw that coming from a mile away.

  8. Rons Dixon

    October 1st, 2007 at 11:22 am

    Can someone really explain to me, why ebay bought skype? Even Meg had a hard time explain the rationale of the purchase.

  9. Olivier

    October 1st, 2007 at 11:49 am

    It always surprises me that some of the smartest people in computer science/tech fields do not have the most basic understanding of finance.
    If Ebay fully leveraged this transaction at a 7% interest rate over 10 years (which they didn’t and knowing that they have a cost of capital greater than 7% means it’s even more expensive) means that they would have needed to cash flow over $200m per year just to pay back the principal and interest.

    Somehow, I doubt Skype is even breaking the $50m barrier. You do the math.
    And with Skype pulling all sorts of stunts (connection fees etc.) I don’t see how they are going to attract even more users.
    VOIP is a commodity and they shouldn’t expect fat margins.

  10. Sig

    October 1st, 2007 at 11:52 am

    Originally, they stated the purpose was to implement pay-per-call in Ebay listings, but then they announced a similar deals with Yahoo (domestically) and Google (non-U.S.).

  11. randy

    October 1st, 2007 at 11:59 am

    A spam-riddled auction site and a defunct IM clone? Not sure what people were expecting here.

  12. Blogger

    October 1st, 2007 at 12:27 pm

    With $530M payout guaranteed you wonder what motivations he had if any to make it happen at eBay. This would be a classic incentive vs objectives case study.

  13. Steve Ballmer

    October 1st, 2007 at 12:41 pm

    Say good night Skype!
    It was nice but we have to see ya later.
    Who are those guys carrying out your furniture?

    http://fakesteveballmer.blogspot.com

  14. John S

    October 1st, 2007 at 12:45 pm

    This deal could have made sense (whether at that valuation, though, it’s tough to say), if eBay had actually looked at what they had at hand. Namely, had they packaged up Skype with PayPal and a white-label version of eBay, they’d have the perfect platform for small businesses. You could get a store front, settlement and even a call center for a low cost and from one provider.

    The problem here was a lack of execution and imagination. I’m guessing it has to do with the way eBay is organized, but I’m strictly guessing there. Of course, nothing else explains the Yahoo! and Google click to call deals. Sounds like something AOL/TimeWarner would do.

  15. Randy Smythe

    October 1st, 2007 at 12:52 pm

    Zennstrom’s just taking the cash and moving over to Joost. They weren’t going to hit their earnout requirements so why not negotiate an exit. The Street already priced in the Skype debacle.

    So now the “Power of Three” is pretty much down to PayPal. eBay Marketplaces are growing in single digits and Skype is underperforming. Thank God for PayPal.

  16. Rons Dixon

    October 1st, 2007 at 1:10 pm

    Olivier, you obviously missed the mark here, my question was rather rhetorical. And your assessment of the purchase is as close to the strategy as Mars is to Earth.

    Two key factors .
    Skype was considered the fast-growing company and reported it has 54 million subscribers and adds 150,000 users each day

    One of the biggest complaints ebay was receiving from sellers was communication between sellers and buyers. They say this as a way to bridge the communication gap while at the same time capitalizing on (by charging for use of the) service. When you consider that ebay members were sending about 5 million messages each day in total. Do the math, even half of that was suppose to be converted to skype traffic.

    My question was meant to spark whether or not ebay would have been better building the communication platform than buying skype. Had it worked out, we would be asking a different question now.

  17. sriram

    October 1st, 2007 at 1:12 pm

    analyst Henry Blodget?

    “In 2002, Eliot Spitzer published Merrill Lynch e-mails in which Blodget allegedly gave assessments about stocks, which conflicted with what was publishing publicly.[4] In 2003, he was charged with civil securities fraud by the U.S. Securities and Exchange Commission. He settled without admitting or denying the allegations and was subsequently banned from the securities industry for life.”

  18. Fake Mark Zuckerberg

    October 1st, 2007 at 1:13 pm

    Seriously Fake Steve Balmer…..We will buy your company and turn it into a factory that makes the monkeys that clash the symbols

  19. trevo

    October 1st, 2007 at 1:30 pm

    Guys guys, if eBay wanted a communication platform, they could’ve bought dozens of VOIP/Voice-Chat clients for a million or so.

    The sole motivation for the deal is so that a public VC backed company can give a “liquidity event” to another VC backed company. Look at all these rich deals (see Google/YouTube). The acquirer and acquiree are almost always backed by the same group of VCs (Kleiner/Sequoia/Benchmark etc).

    Its a shell game boys. Those of you “startup entrepreneurs” who aim to get acquired for billions better start buttering up to one of these VC’s. You scratch their back… (give them a shell startup to invest in), they scratch yours (you get a small slice of the pie once they unload your shell startup to the larger public company for Billions).

  20. Don Jones

    October 1st, 2007 at 4:02 pm

    Maybe the Skype guys were too busy with their venture capital outfit, Atomico…

  21. Alex Linhares

    October 1st, 2007 at 6:14 pm

    Where’s my comment? :(

  22. Eric

    October 1st, 2007 at 8:06 pm

    What happened to the click to call applications on eBay. Thouhgt that would have beeen a winner.

  23. phenom

    October 1st, 2007 at 8:25 pm

    stepping down….
    http://vidsonly.blogspot.com

  24. Moses Kagan

    October 1st, 2007 at 10:08 pm

    It was never clear why Skype was complementary to eBay’s core business, nor how Skype was going to monetize a widely-dispersed, highly price-sensitive audience. More analysis at moseskagan.com.

  25. Krixxr

    October 1st, 2007 at 11:40 pm

    Meg, could you please close the door! No, I mean from the outside, you also way overpaid for Paypal back then.

  26. Alex Linhares

    October 2nd, 2007 at 8:40 am

    Why hasn’t my comment been published?

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