Will Skype's Founders Put the Kibosh on eBay's IPO Plans?

skype_logoWaiting for eBay to spin off Skype into the stock market? Don’t hold your breath. A legal battle with a company controlled by Skype’s founders could delay the move until at least the second half of next year — and possibly put the entire offering into jeopardy.

eBay said back in April that it intends to separate Skype from its core operations by spinning it out via an initial public offering in the first half of 2010, a plan CEO John Donahoe called “the best path” for Skype. Just last week, he reaffirmed that point, adding that the “synergies between Skype and the other parts of our portfolio are minimal.” The specific timing of the IPO, according to eBay, would depend on market conditions.

But according to the company’s 10-Q filing with the Securities and Exchange Commission filed Wednesday, a legal dispute over the licensing of Skype’s peer-to-peer technology from Joltid Ltd., which is controlled by Skype’s founders, could complicate those plans. eBay is in the midst of a slow turnaround and could use the cash a Skype IPO would bring to lay the groundwork for its future growth.

In March — a month before it announced plans for the Skype IPO — eBay filed a claim against Joltid related to the license in the English High Court of Justice. Joltid responded by terminating the license agreement between the two companies. According to eBay’s claim:

Joltid has alleged that Skype should not possess, use or modify certain software source code and that, by doing so, and by disclosing such code in certain U.S. patent cases pursuant to orders from U.S. courts, Skype has breached the license agreement.

The usual legal snipes ensued, with Joltid alleging in a counterclaim that eBay and Skype were infringing its copyright. Skype, meanwhile, asked the court to declare that it’s not in breach of the licensing agreement. The outcome is unclear, but without a resolution with Joltid the whole dispute won’t go to court until June of next year. That will delay a Skype IPO by months at best and, depending on the outcome, could hurt its chances of ever seeing the light of day.

In the filing, after noting that it’s confident of its legal position, eBay said ominously:

[T]here is the possibility of an adverse result if the matter is not resolved through negotiation. Skype has begun to develop alternative software to that licensed through Joltid. However, such software development may not be successful, may result in loss of functionality or customers even if successful, and will in any event be expensive. If Skype was to lose the right to use the Joltid software as the result of the litigation, and if alternative software was not available, Skype would be severely and adversely affected and the continued operation of Skype’s business as currently conducted would likely not be possible.

Although Skype hasn’t been integrated into eBay’s e-commerce business, as the company hoped it would be when the acquisition was announced, it has been an area of growth for eBay. Skype’s revenue grew 26 percent in the second quarter of 2009 to $145 million as registered users increased by 47 percent to 405 million.

Skype has to be one of the most expensive albatrosses to ever hang from the neck of a Silicon Valley company. After spending $2.6 billion to buy it in 2005, eBay later wrote down the value to $1.7 billion. Skype has grown while under eBay’s control, but continues to stand apart from its parent’s other operations, like an unwanted stepchild.

And yet eBay still licenses the peer-to-peer technology from the company’s founders. How could eBay spend billions on a company and not have control over the technology behind it?

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