EBay's bad Skype call - we told you so
When Skype - an Internet phone-calling service - was bought by eBay in 2005 for $4.1-billion (U.S.), there was much head-shaking among analysts and other observers of the deal (including yours truly).
Why pay so much for a company that not only gave its software and services away free of charge, but had revenue of just $60-million?
The online auction company made a lot of pronouncements at the time about synergies between the two, and how eBay would be able to offer users of its auction system seamless voice-calling features to add to their online stores (although many eBay "power sellers" said they weren't interested in such services).
Two years may be a long time to wait just to say "I told you so," but critics of the deal got about $1.4-billion worth of reasons to say exactly that this week, as eBay took a massive writedown on the value of its stake in the voice-over-Internet provider.
The company also announced that Skype co-founder Niklas Zennstrom (who is also a co-founder of Joost, the Internet TV service that launched this week) had stepped down as CEO.
As part of the original $4.1-billion bid, Skype shareholders were offered a lump sum of $2.4-billion, plus what is known as an "earn-out" clause, which would see the company receive an additional $1.7-billion if it met certain growth targets.
On Monday, eBay announced that it was paying Skype $530-million under the earn-out clause, or less than a third of what it had originally promised. The auction company also said it was taking a $1.4-billion writedown on the value of Skype - $530-million for the earn-out payment, and another $900-million in goodwill "impairment."
In other words, eBay paid $1.4-billion too much, meaning 50 per cent of the purchase price was effectively money down the drain.
What seems obvious now is that the synergies eBay thought might be achievablenever materialized, either through failure of execution on eBay's part, or because they were never there to begin with.
Several analysts have pointed out that the questions about Skype's value are just water under the bridge now, and eBay is growing fairly strongly again (the company's share price actually went up after the writedown).
Goodwill writedowns, these supporters argue, don't really affect the future cash flow of a company, and can actually make the balance sheet look better once they are taken, in a perverse kind of way.
At the same time, however, shareholders have to be wondering what kind of thought process the company went through before it agreed to pay $4.1-billion in the first place, and whether that kind of mentality might get the company into trouble again.
And what happens to Skype now? Henry Blodget, a former Wall Street analyst who became infamous for saying Amazon would go to $400 a share (which it did), wrote recently that eBay should sell the voice-over-Internet company to Google or Microsoft, or some other company that might have more use for it.
It's either that or get to work making Skype a real part of eBay's business.
Of course, the auction company has had two years to do that and has so far failed miserably, so perhaps it's best not to get your hopes up.
