Skype Sale Nears: Why eBay Shareholders Should Be Mad

If you’re an eBay shareholder, it’s time for you to get mad about the sheer incompetency of the management. First they paid top dollar for Skype back in 2005, making billionaires out of Niklas Zennstrom and Janus Friis. And, now instead of waiting for an opportune time to go public, eBay management is selling low, at a time when the only buyers are bargain hunters.

The New York Times reports that eBay is nearing a deal to sell Skype, its Internet calling service. The news was first reported by TechCrunch last week. It was initially reported that Marc Andreessen’s new venture fund, Andreessen Horowitz, and original Skype investors Index Ventures were among the likely buyers of the company. Silverlake Partners, a Silicon Valley-based private equity group, is said to be involved with the deal, the Times adds.

Silverlake’s inclusion makes absolute sense — after all, Index and Andreessen Horowitz don’t have the funds to move the needle, for San Jose, Calif.-based eBay is rumored to be looking for $2 billion for Skype, which sounds bizarre considering that as recently as May, eBay CEO John Donahoe was quoted as saying that $2 billion was too low a valuation for Skype.

eBay bought Skype in 2005 for $3.1 billion (though the price has since come down to about $2.6 billion) but a series of management blunders turned a fast-growing startup into a cesspool of mediocrity and bureaucratic infighting. It was as if someone opened the fuel tank on a rocket heading to the moon. It was only last year, when Josh Silverman was appointed chief executive, that sanity returned to Skype. With the calling service on track to bring in $600 million in revenues in 2009 (though we’re not sure how much profit it makes for eBay), the company is a likely candidate for a public offering when the IPO window opens again, perhaps in 2010.

That’s why the decision to sell the company at just over three times sales doesn’t make much sense to me. Unless, of course, eBay management is trying to use this deal to paper over the problems that continue to plague its core business of auctions. The other reason could be the legal problems faced by Skype. These legal problems are a primary reason Skype’s IPO dreams have turned into a nightmare.

As we reported earlier, Skype co-founders Zennstrom and Friis tried to buy the company back from eBay but were rebuffed. The duo own a company called JoltID, which has since then sued Skype, alleging that eBay over the use of its P2P technology, which is at the heart of the Skype service. Here is what Friis told me in 2006:

Kazaa and Skype were based on a piece of technology called the “Global Index.” Skype basically built a communication layer on top of that. That technology has evolved since then, and the Venice Project, is built on that global index and we have developed a P2P video streaming layer on top of that core technology.

So back in 2005, eBay paid billions for Skype but didn’t get the crown jewels, aka the technology. I reported this oversight back in 2005. How then-CEO Meg Whitman signed off on the deal, I still can’t understand. I mean, even a lemonade stand owner who can’t tie his shoelaces wouldn’t overlook something as simple as that. And what about the eBay executives who were shepherding that deal?

So anyone who buys Skype will have to contend with that litigation. It’s already scared off Google from buying Skype. It’s not clear if Zennstrom and Friis are involved in the rumored deal reported by The New York Times.

The best course of action for eBay is to have patience. It should try and work out a deal with the JoltID crew, and wait to go public. After all, eBay has already taken a $1.7 billion dollar write-off on the deal. Why not wait and recover all its money?

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