FT : Skype Was No Blunder For eBay
Wednesday, September 2, 2009
It is commonly called one of the dumber deals to come out of techland – which has given birth to quite a few dud transactions in its time. Online auction house Ebay bought Skype in 2005 for $2.6bn. Two years later, it took a $1.4bn writedown after fewer Ebay users than expected were tempted by software that makes calls over the internet. But on Tuesday Ebay announced it had sold a 65% stake in Skype for an implied valuation of about the same that it originally paid, after adjusting for the earn-out payments to the company’s founders.
Far from being chastised, therefore, former chief executive Meg Whitman deserves credit for orchestrating one of the better performing investments over the past five years. While the value of Skype has remained flat, the Bloomberg world equity index has fallen 6% while the S&P 500 has dropped by a fifth. Including their latest rally, even US tech stocks are down by a 10th over the same period. And that is before Ebay makes a writeback. Ebay should also be applauded for getting almost five times sales – far more than the market was expecting (less than $2bn for the lot). Why have a smart bunch of private equity investors and venture capitalists, not to mention a big Canadian pension plan, ponied up? One reason is that Skype is growing its top line by about 25% year-on-year and added more than 100m registered users last year. So-called “SkypeOut minutes”, the time users are paying to be connected to fixed-line and mobile phones, jumped by a half. Another reason may be that out of $550m of sales last year, $290m was accounted for by cost-of-goods-sold, mostly the expense of buying telecoms network capacity. Given Skype had an operating margin of 23% last year, this means that other expenses must be under control. Ebay bagged a rich price, but Skype now appears very scalable indeed.