Sub-heading: Kara Swisher I just want you to notice me!
Up until today’s announcement that eBay will sell a 65% stake in Skype to Silver Lake and others there was a growing distaste for the auction company and that ‘it paid too much’ for Skype ‘at the top of the market’. Disappointingly Kara Swisher of All Things D was one of them. Kara and PEHub Dan Primack are my two favorite reporters. Their writing, rigor and insight stand out like bright lights in my Google Reader amongst the fistfuls of Nicholas Carlson re-hash crap that pollutes it. So it’s with love that I write this critique with particular personalization.
Here is a post Kara wrote in March about Skype. In the original version of the post I immediately commented on the story saying “How did you possibly justify this statement alongside the graphic: “Skype’s lackluster performance has made many think it was a very bad acquisition for eBay (EBAY), which paid $2.6 billion for it in 2005″. She never replied in the comments.
She did edit the post and watered down the offending line to “Still, right or wrong, many investors argue that Skype was a very bad acquisition for eBay (EBAY), which paid $2.6 billion for it in 2005 and there are consistent rumors that eBay is looking to unload the service.”
And now that the company effectively has we can judge Meg Whitman’s big bet on the company in September 2005. Firstly because of the structure of the agreement there are many different levers behind the ‘headline’ deal number ($4.1bn). The earn outs were not met and the company actually only paid $3.1bn. But also of note is that the firm only paid $1.8bn in cash and $1.3bn in eBay stock.
How does today’s announcement validate or invalidate the decision? Well the $2.75bn valuation means that eBay’s investment has a negative 6% internal rate of return (IRR). If the firm would have declined to buy Skype and instead parked the same amount of money in the S&P 500 they would have ‘earned’ a negative 10% IRR. So Skype has out-performed the broader stock market over the term of the investment.
But let’s dig deeper. eBay’s stock price was $38.62 on September 9, 2005 when the deal was struck. The stock is now $21.68. That means the company as a whole has declined at 25% per year since acquiring Skype. If anything, Skype has held up (more correctly Paypal and Skype to a smaller extent have held up) the great value destruction of eBay’s core marketplace.
Also it essentially means that on a cash basis eBay hasn’t spent a dime ($1.9bn back with the sale vs $1.3bn initially + $0.5bn earnout for the purchase) and that for issuing some over-priced stock in 2005 it now has 35% of a great asset in Skype.
The experience is not a home run but it certainly has been a positive one after Meg Whitman pulled the gutsy trigger 3 years ago. Skype, despite the company’s best efforts, was a success for eBay.
