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Summary:

eBay can finally breathe a sigh of relief about its ill-fated Skype acquisition, now that Microsoft has bought the company for $8.5 billion. A back of the envelope calculation shows that eBay might have made a 40 percent profit on its Skype adventure. Here’s how.

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When eBay bought Skype in October 2005 for up to $4.1 billion dollars, turning founders Niklas Zennström and Janus Friis into billionaires, I was among the most vocal critics of the deal. I felt that it was going to kill the Skype franchise and that eBay would lose its shirt.

For the first two years, the company did lose its shirt as it spiraled out of control. eBay failed to integrate the company and, in the process, became the poster child of the how not to do a merger case study. But today, with Microsoft finally confirming the news we first broke on May 8, eBay can breathe a sigh of relief. A back of the envelope calculation shows that eBay might have made a 40 percent profit on its Skype adventure. Here is how.

While the initial announced price for Skype was up to $4.1 billion, eBay paid about $2.6 billion for the company and another $530 million in earn-outs to the two founders. So in total it spent about $3.1 billion.

In November, eBay sold 70 percent of the company for $1.9 billion to various investors and the Skype co-founders. The company received about $2.5 billion from Microsoft for rest of its share of Skype. In total the company has received about $4.4 billion or just over 40 percent more than it paid.

When eBay bought Skype, its stock was $40 a share. Now whether it was because of disastrous management or Skype, eBay stock took a nosedive and has only recently started to recover. If it used the $3.13 billion to buy its own stock, eBay would have lost about 21 percent on the investment. Even buying S&P 500 Index funds would have resulted in about 8 percent gain. (The S&P 500 was at 1,250 in Oct 05, and is at 1,346 today, for a gain of about 8 percent over the period.)

Today might just be the right day for everyone involved with Skype to take a moment and think about Josh Silverman, who took over Skype at a time when it was unraveling and had seen many chiefs come and go. He (along with some amazing people at Skype) stabilized the company, even though his understated style often came for a lot of criticism.

He took over Skype’s top job right after eBay took a $1 billion write-off in 2008. One would say, Silverman and other Skype members have done a good job of turning a turd into a saleable asset. He left the company after the spinout and is currently an EIR at Greylock Ventures.

eBay CEO John Donahue can pat himself on the back and say job well done. And more importantly, he is now free from the ghost of Meg Whitman that has haunted his tenure at the top position. Maybe it’s even time to send Silverman a big case of bubbly!

  1. Don’t forget the operating losses @ Skype that Ebay has had to absorb over the last 6 years. Just looking @ the S1 shows about $574M in operating losses from 2006-2010. Still looks like on a cash in, cash out basis they made some money, but not much, especially when you consider they could have pocketed all $8.5BN if they waited 6 months and ran a process. I don’t see how giving away $4BN counts as a win.

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    1. That is one way of looking at it. There is a good chance things would be a lot worse if they had kept the company. I think the total operating loses aside, the company has done to recover well from the disaster Skype was for them.

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  2. The original acquisition by Meg in 2005 was a mistake–nearly everyone agrees with that. However I think the question is did John Donahoe make the right move in selling 70% of Skype at a loss in 2009? I think yes as it provided the best means for @Skype to drive growth toward either IPO or acquisition. We now see with the latter that it paid off for its shareholders in a way that frankly would not have occurred thru a direct sale from eBay (especially in that economic environment).

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  3. “If it used the $3.13 billion to buy its own stock, eBay would have lost about 21 percent on the investment”

    You can’t know that. It’s nice to think that buying 15% of one’s own stock off the public markets would have no effect on its price, but of course it’s not that simple.

    They also could’ve paid a dividend. They could’ve earned interest on the cash without incurring losses on Skype along the way. Yes. “Phase II” of the investment was a successful one. But given the unmitigated disaster of Phase I (a) maybe they could’ve sold off less and still made Phase II work (b) they obviously which they never did this in first place.

    This was the worst kind of Silicon Valley groupthink. A lot of us — at the time of the original buy by eBay — could not imagine what happened on those whiteboards to manufacture the fake synergies between these two unrelated companies.

    This time around, the fear is different: Microsoft is paying a lot to get very little.

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  4. I’m interested to see what the result is for Microsoft now, I know a lot of people have been negative about it, but frankly, Skype seems like a great buy for Microsoft.

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  5. This was a bumbling move at best, ebay is no longer the fun one-on-one auction site that it once was, it seems like they are grappling any way or other to make a buck or 2 with all of these senseless acquisitions. Once all and said and done, this whole Skype adventure will be dust.
    Skype got popular because it was a way to make long distance calls for little or no money, not a great business model to pay billions for. kind of like the Napster adventure !

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  6. With old time Microsoft VoIP guys now helping to run the show at Skype, there’s no wonder how this deal came about. Job well done to the baguette and pineapple.

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