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EBay to buy Internet phone firm Skype

Ebay has agreed to buy Skype, the fast-growing provider of voice calls over the internet, for $2.6 billion, with the price rising to as much as $4.1 billion if the company hits certain performance targets over the next three years.
/ Source: Financial Times

Ebay has agreed to buy Skype, the fast-growing provider of voice calls over the internet, for $2.6 billion, with the price rising to as much as $4.1 billion if the company hits certain performance targets over the next three years.

The deal ends a flurry of takeover approaches from other internet and media companies, and will add a new communications capability that Ebay executives said would be complementary to its existing ecommerce operations.

The deal also represents a big bet on Ebay's ability to profit from voice communications over the internet. Skype, which was set up in 2002, generated revenues of only $7 million last year, though this is likely to rise to $60 million this year and more than $200 million in 2006, the companies said. Skype users can make calls between computers free of charge, but pay for making calls to a traditional telephone line.

Ebay said the Skype service would be integrated into its ecommerce business, greasing the wheels of its online marketplace by making it easier for buyers and sellers to communicate. Meg Whitman, Ebay's chief executive officer, said that communications was "at the heart of ecommerce and community," and that the acquisition would create "an extraordinarily powerful environment for business on the net."

The internet company also said the acquisition would take it into new markets, for instance by allowing it to charge a "pay-per-call" fee to merchants that used its services to generate new sales leads. That service could signal a closer rivalry with Google and other search engine companies, which also charge based on the number of new sales leads they produce for their advertisers.

However, the acquisition has come at a high price, given Skype's largely undeveloped business model and the increasing competition in the so-called "voice over IP" market.

Ebay said it would pay $2.6 billion for Skype, half of in cash and the rest by issuing 32.4 million shares. It added that it would pay up to an additional $1.5 billion in performance-related benefits as part of an "earn-out" to Skype's shareholders, depending on Skype's ability to hit certain targets by 2008.

The deal echoes Ebay's $1.5 billion purchase of PayPal, the online payment company, which also involved adding a new feature to Ebay's markets that was intended to increase the level of trust between buyers and sellers and improve the chances of transactions closing.

As a network that links many private buyers and sellers around the world, eBay already acts as a giant communications company, handling millions of e-mails a day, though it does not have a real-time communications network to let its users contact each other to agree deals or settle disputes immediately.

However, Skype's business is far less developed than PayPal was at the time it was bought. PayPal had already gone public and was generating around $200 million in annual revenue when Ebay bought it.

Rajiv Dutta, Ebay's chief financial officer, said that Skype's early success had exceeded even that of eBay and PayPal, both of which had been slower to turn their early users into fee-paying customers.

He added that Ebay had assessed the purchase price based on a number of factors, including the expected future earnings from Skype, the valuation of other internet acquisitions and number of Skype users. Some 54 million people have downloaded Skype's software, making the price that Ebay has paid for each user lower than the amount it paid for PayPal, Dutta said.

The acquisition would break even in the fourth quarter of 2006 and add $2 million to the bottom line that year, he said. "We are funding through internally generated cashflows. Our balance sheet fundamentals remain unchanged."

Niklas Zennström and Janus Friis, Skype's founders, have been among the first to attract a big following for an internet voice service. The "network effects" of the service, which is attracting approximately 150,000 new users a day as newcomers join Skype to communicate with people already on it, meant that this early lead would prove lasting, according to Michael Jackson, Skype's chief operating officer.

The high price for the relatively undeveloped company, which is headquartered in Luxembourg and run from London, also appeared to reflect the competition from other big internet and media groups, including Yahoo! and News Corp, as well as the lofty valuations that internet companies have reached since the PayPal deal.

Zennström, chief executive, and Friis, senior vice-president for strategy, would remain in their current positions, Ebay said, with Zennström reporting to Whitman and joining the Ebay executive board.