FT : eBay Admits To Skype Valuation Blunder

Tuesday, October 2, 2007

Ebay on Monday conceded that its controversial acquisition of the internet telephone service Skype had fallen well short of its hopes, writing down the value of its investment in the company by $1.43bn (£695m), or nearly 50%.  At the same time, Niklas Zennstrom, one of the founders of Skype, quit as the unit’s chief executive after missing out on a pay-day that could have earned him and a handful of other shareholders an extra $1.2bn.  The write-down and management upheaval come two years after Ebay unveiled its controversial plan to make Skype the third leg of an expanding internet conglomerate, alongside its e-commerce and online payments businesses.  However, while the internet telephone service has continued to add users at a fast rate, it has so far failed to produce the sort of e-commerce and advertising revenues that Ebay had hoped.  “At the time, we thought strategically it didn’t make a lot of sense and the price seemed excessive,” said Scott Kessler, an analyst at Standard & Poor’s, echoing a view of the deal that was widely held on Wall Street.  On Monday, however, Ebay continued to insist that its long-term hopes for Skype were unchanged, and said it had no plans to sell the business…..Ebay agreed two years ago to pay $2.6bn for Skype and spend up to €1.2bn (£836m, $1.7bn) more if the unit hit performance targets over the following three years.  In the event, the company said that it had made an early payment of only €375m to end all its obligations, taking its total purchase price, based on current exchange rates, to about $3.13bn.  The partial payment of the “earn-out” provision reflected Skype’s success since the acquisition in building its base of users to 220m, an Ebay spokesman said.  He would not comment on other targets that Skype had failed to meet, but these are believed to relate to its revenues.  Ebay had hoped to make money from Skype by turning it into a broader online platform, using it as way to reach more internet users with its ecommerce services and gaining wider reach for its PayPal online payments system.  Skype revenues reached $168m in the first half of this year, but the company admitted yesterday that this was shy of its short-term goals.

Poker Face

Place your bets. In July 2005, Rupert Murdoch snapped up MySpace, for what seemed an aggressive $580m.  In September of the same year, eBay’s Meg Whitman had a $3.1bn flutter on internet phone group Skype.  Two years later, how do the two gamblers stack up?  Mr Murdoch’s News Corporation is lauded for being early to spot the social networking trend.  If rumours of a $10bn valuation for a stake in smaller rival Facebook have any truth, the return on his MySpace investment looks huge.  Ebay in contrast, bet big and lost…..Where does that leave the media and technology giants circling today’s hot, private internet companies such as Facebook?  Should they remain disciplined on valuation and risk “doing a Viacom”?

The media group saw MySpace stolen from under its nose by News Corp in 2005.  Or do they pay up, keep an asset out of rivals’ hands, and risk a nasty eBay-style writedown in the future?  The truth is that a company such as Facebook is no diamond in the rough.  At anything like $10bn, the site will have to perform superbly on generating real revenues, as well as just page views, to grow into the valuation, let alone surpass it.  Given fickle user bases and continuing questions over social-networking business models, the risks of disappointment are huge.  After all, in spite of MySpace’s success, such a lofty valuation is not factored into News Corp’s share price.  The trouble is there are a lot of deep-pocketed companies, including Google and Microsoft, for which the risk of a multi-billion dollar write-off is not life threatening.  The risk of missing the next big thing is huge – witness Microsoft’s desperation, having messed up on internet search.  With so much success already baked into valuations, the odds of any bet generating a huge return are thin.  But rivals could still scare each other into rolling the dice – especially if they are only paying for a stake, not the whole company

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