eBay bought Skype in September 2005 for $4.1 billion. Today they sold 65% of it for much less, valuing Skype at $2.75 billion. It seems like a big loss, and guys like Om Malik are saying eBay shareholders should be angry.
I’m not going to argue with the fact that eBay was negligent in buying a company without taking control of its core intellectual property. But when I look at this deal, and how the market has changed in the last four years, it looks to me like eBay made out ok. Or even more than ok.
First of all, eBay never paid the full $4.1 billion for skype. 2/3 of a $1.5 billion earnout wasn’t paid, so the total purchase price was around $3.1 billion. After the write-downs, eBay was carrying Skype on its books at a value below $2 billion dollars.
Skype is projected to make $200 million of so in EBITDA in 2010, so today’s acquisition implies a 14x multiple on that EBITDA (thanks to Mark Mahaney at Citi Investment Research for the quick financial analysis). Mahaney says “From a non-strategic buyer, that would seem to be a high multiple.” Clearly, ebay got more for Skype than they thought they would.
Also, the market (and eBay) hasn’t done too well over the last few years. Half of the original purchase price was paid in eBay stock, which has declined by more than 50% since late 2005.
Finally, Skype has been profitable, and eBay has taken those profits off the table. Skype was likely breakeven in 2006, says Mahaney. But he estimates they generated $44 million in cash flow in 2007, $116 million in 2008 and projected $164 million in 2009. That’s $324 million eBay has taken off the table in aggregate.
The market is way, way down and Skype is a somewhat damaged asset with the IP litigation ongoing. The fact that eBay is getting most of its purchase price back, in cash, is a big win for them. And they still own 35% of the company and can get additional gains in a later IPO or sale. And the best news is that Skype is finally free of the dragging effect of a huge corporate parent. They can now move forward and find their destiny.
In addition you need to add back all the profits that skpye generated for ebay. Given this and the decline in share price ebay actually made money.
C’mon Walt, did you not read the article?
“Finally, Skype has been profitable, and eBay has taken those profits off the table. Skype was likely breakeven in 2006, says Mahaney. But he estimates they generated $44 million in cash flow in 2007, $116 million in 2008 and projected $164 million in 2009. That’s $324 million eBay has taken off the table in aggregate.”
eBay will now buy Twitter. You heard it here first!
Future of skype will hinge on wireless carriers/PDA makers selling just the bandwidth and people running skype…
a billion here, a billion there, you are going to sum up with a big money
I completely agree Mike. After the writedowns, they got 1.9B cash for their ~2B on the books while keeping 35% of the company. If they can redeploy the capital to a higher ROI aspect of their business then capital markets should look at this favorably (in the mid to long term).
This is good news for everyone involved. If shareholders have anything to gripe about it’s eBay getting in the way of itself (or Skype) and not allowing the company to continue to grow and develop new products and services. Let’s hope we see something great from the newly liberated Skype soon.
You have neglected to cover 1) the time value of money 2) money they invested in Skype post acquisition to make it profitable 3) opportunity cost (they could have bought someone else or invested in the core eBay business) 4) management cost in dealing with Skype. 5) there’s book accounting and cash flow accounting, need to differentiate the two. In short, it was a bad acquisition and this buyout has helped eBay destroy less capital. I know all the digerati love Skype, but it’s not about the Skype product. It’s about how stupid the eBay management team was in pursuing this acquisition. Looking forward to see the brilliant minds at Silverlake (who bought the damaged incumbent Avaya at the peak of the market) lead the race to zero pricing in telecom.
i’ve actually been pretty hard on skype over the years. and the time value of money in this case seems to be quite negative given the stock drop. eBay has now taken much more cash off the table than they paid for Skype, given the 50% in stock in the original deal.
Finally, an analysis that looks at more than just the difference between two large numbers…
funny how my posting was removed once i pointed out some flaws in the article’s analysis. i now understand how the sovietization of techcrunch works. make sure you all tow the party line
no, it was a good comment. just stuck in moderation like all comments are. disagreement is good.
If you’re going to be an asshole, ricosuave, I suggest you at least get your grammar right.
It’s “toe the line,” and the phrase has nothing to do with “cowtowing.” You are correct, however, that your message does neither.
my post just came back up. i guess the commisar is in a good mood today
Comments are rarely moderated here…..from what I can tell.
The only type of comments I wish they’d moderate are stuff like that Indian spammer guy. (seems like he’s finally gone) Just that name (something like sexygirlblog or something) was so damn annoying.
Has anyone seen the detailed deal terms? I wouldn’t be surprised if eBay has to indemnify the IP litigation out of its retained shares.
Oh yeah, the buyers would be stupid for not keeping eBay on the hook for this. Everyone knows it is a big issue.
This is a pretty good analysis Mike. Best part: the upside of 35% equity in a company throwing off a lot of free cashflow. Ebay will more than make its money back and then some.
Finally a halfway decent piece of reporting on the eBay-Skype sale that takes the real cash portion into consideration. Ebay got beaten up really badly about this purchase in 2005 but they managed to turn Skype into a nice growing business with real numbers. 14 times EBITDA is a great sales price considering where the market is at this time.
Michael – this is a contrarian stance that i agree with and appreciate. Well researched, well thought… thanks for the post.
I wouldn’t say this is a contrarian view.
This article was already written by another publisher
it’s funny how management tries to put lipstick on a pig by saying we may have overpaid, but we overpaid with it with an overvalued stock which is now back down to earth. so were we not smart to go on a spending spree while the stock was high? under the above rationale, the AOL / TW deal looks like a good deal from AOL’s perspective. the right way to think about it is opportunity cost. what could they have bought for $3-4 billion dollars a few years ago. as an ebay stockholder, there were many other opportunities to destroy less value (including paying a dividend).
This is a great piece mike, really enjoyed it. I think the mere fact that the initial purchase was paid in stocks did it for them. They actually came out on top despite what the big numbers says.
I’m sure ebay will still manage to do well out of the deal, as mike points out they still own 35% of the company. When ebay bought skype there were only 53 million users which has now risen to 405 million and likely to keep rising, granted most of these users don’t pay but the ones that do generated $170 million in the last quarter. If ebay keep their share of the company for some time, i’m sure they’ll be very happy.
I’m really pleased the Skype monkey is off Ebay’s back, for me it just never fit in with their business (along with SumbleUpon). As a shareholder, I’m really satisfied with the sale, the new CEO is flogging all the crazy acquisitions the previous CEO made.
eBay’s numbers and generally good, and I’m confident the new CEO will get eBay focussing back on their core auction business.
To me, it looks like eBay got 35% of Skype pretty much for free, so providing it claws its way out of the current legal battle, Skype could be a really good investment for eBay and their shareholders.
Andy
The thing with Skype is the lost potential.
The skype phones should have been a game changer. Something to makes phone companies sweat.
Do you think it’s too late? What would stop them from eventually making them?
So, Skype is allegedly worth 2.5 billion and Marvel is only worth 1.5 billion more than that, at 4 billion. Ha!
Bubble, bubble, toil and trouble………