EBay Buys Skype for $2.6B

eBay Inc. has agreed to buy Luxembourg-based VOIP service provider Skype Technologies SA in a deal worth an initial $2.6 billion, but potentially worth $4.1 billion.

The online retailer will pay an initial $1.3 billion in cash plus 32.4 million shares, currently worth $1.25 billion -- plus a further payment of up to $1.5 billion in 2008 or 2009 if financial targets are met. The deal is expected to close in the fourth quarter of 2005.

eBay's share price closed Friday at $38.62. Today's news sent it down 76 cents, nearly 2 percent, to $37.86 in pre-market trading.

The acquisition represents a mammoth return on investment for Skype's backers. Since the company was formed in 2003 by Niklas Zennstrom and Janus Friis, it has received an undisclosed initial round in December 2003 -- from Bessemer Venture Partners, Draper Investment Co., Mangrove Capital Partners, and Tim Draper as an individual investor -- and a further $18.8 million in March 2004 from a number of investors, including Draper Fisher Jurvetson and Index Ventures (see VCs Pump $18.8M Into Skype ).

Zennstrom, Skype's CEO, and Friis, the firm's VP of strategy, are to retain their roles, with Zennstrom joining eBay's senior executive team.

So what is eBay getting for its money? For a company with quarterly revenues of more than $1 billion, and net income in its latest quarter (ended June 30) of more than $290 million, Skype, which employs about 200 staff, won't be adding a great deal to the bottom line. The VOIP firm, best known for its free voice services between its users, generated just $7 million in sales in 2004 from its pre-paid SkypeOut and SkypeIn services, and is set to record revenues this year of about $60 million. This, though, is set to rise to $200 million in 2006, according to Skype's estimates.

Probably more importantly to eBay, Skype has 54 million registered users that the online retailer can add to its marketing arsenal. The initial payment of $2.6 billion values those registered users at just more than $48 each.

eBay estimates the acquisition to be dilutive to its earnings until the end of 2006, when Skype is set to break even. In the long term, it expects Skype's operating margins to be in the 20 percent to 25 percent range.

In an official statement, eBay says the addition of Skype's voice and messaging services to its online marketplace and PayPal payments platform "will create an extraordinarily powerful environment for business on the Net. Is that worth up to $4.1 billion? Light Reading's readers have their doubts (see Readers Scoff at Skype Hype).

eBay's move comes as a number of high-profile online companies throw their hats into the VOIP ring (see Microsoft Buys Skype Rival, Google Talks the Talk, and Yahoo Enters VOIP Fray). Google's move into voice is seen as a particular threat to Skype's model (see Poll: Google's Shooting for Skype).

Another VOIP service provider, Vonage Holdings Corp., will be watching the fallout from today's news with particular interest. Given Skype's high valuation, Vonage and its backers might feel this is the time is right to make a fundraising move (see Sources: Vonage Is Eyeing the Exits).

— Ray Le Maistre, International News Editor, Light Reading