eBay to nab Skype for $2.6 billion

Company executives said Monday that eBay plans to pay $1.3 billion in cash and $1.3 billion in stock to the global communications company. It has agreed to hand over up to an extra $1.5 billion, for a total payout of more than $4 billion, if Skype meets certain financial targets by 2008, according to a presentation to investors on Monday morning.

The move, expected to be complete by the end of the fourth quarter, marks the biggest acquisition in eBay's 10-year history. In another big-time merger, eBay acquired online payments company PayPal in 2002 for about $1.5 billion. It more recently picked up Shopping.com for $620 million in cash.

Luxembourg-based Skype, founded in 2002 by Scandinavian entrepreneurs, offers free computer-to-computer voice over Internet Protocol (VoIP) calls and low-cost connectivity between computer and landline or mobile phones. It is considered the market leader in nearly all of the 225 countries and independent territories where it does business, according to a company press release. The company expects revenue of $60 million this year and more than $200 million in 2006, a Skype representative confirmed Monday. Skype has not yet posted a profit, an executive told Reuters.

Skype generates nearly half of its revenue base in Europe, about a quarter in Asia, and about an eighth in North America. The fast-growing company said it has 54 million subscribers and adds 150,000 users each day. There is currently about a 1 percent overlap among Skype and eBay users, according to the eBay investor presentation.

eBay CEO Meg Whitman told investors in a conference call that she hoped a power trio of eBay, Paypal and Skype would deliver an "unparalleled e-commerce and communications engine" by "removing a key point of friction between buyers and sellers."

"Communication is at the heart of community and e-commerce, making Skype a natural fit for eBay," Whitman said.

When the deal is complete, eBay hopes to integrate the service with its e-commerce operations, allowing buyers and sellers to communicate through VoIP. The auction site would likely collect fees from sellers on a "pay per call" basis, wherein sellers would pay each time a customer called them via Skype, or through a flat amount paid in exchange for a link to the merchant's Skype contact information on his product's page, said eBay spokesman Hani Durzy.

In a sample screenshot shown during the presentation, the username of a Skype-enabled seller would display whether he or she was online. The buyer could click on the name and contact the seller without having to leave the eBay site and without either party having to reveal a private phone number, Whitman said. Right now, e-mail is the primary means for such communications. eBay users send about 5 million messages each day in total.

Whitman said she hopes the service will accelerate sales in categories--such as cars, business and industry equipment, and collectibles--that generate a lot of inquiries. "Imagine searching for an Audi Quattro," she said. "You have a lot of questions about previous repairs, but the listing ends in three hours, which is probably not enough time to e-mail and get a detailed response. Wouldn't it be nice to Skype link?"

eBay also plans to preserve Skype's standalone products, including a new video conferencing feature slated for release later this year, said Skype spokeswoman Kelly Larabee.

eBay Chief Financial Officer Rajiv Dutta told Reuters that the acquisition will cut eBay's earnings by a penny per share in each quarter until the end of 2006 before it begins to positively contribute to its profitability.

Meanwhile, news of the merger had industry analysts scratching their heads.

"I'm really skeptical, I'm surprised, and I'm not recommending the stock," said Scott Kessler, an analyst with Standard & Poor's, adding that he questioned why eBay would want to add Net telephony services--and why Skype in particular--when its users already seem comfortable with e-mail.

Kessler noted that eBay has probably made more acquisitions over the past 12 to 18 months than it did in the prior eight or nine years, and that's often a sign that growth will be slowing. Unlike the PayPal merger, which Kessler supported back in 2002, it is debatable whether eBay will derive the same growth in sales simply by adding voice features to its service, he said.

"It reminds me of the days of the Internet bubble," said Maribel Lopez, an analyst at Forrester Research. "Who buys a company for $2.6 billion anymore that has a miniscule revenue stream?"

Lopez questioned why, given the abundance of VoIP companies in the market, eBay would buy Skype in particular--and how significant a revenue boost the auction company would actually see. "It's not clear to me that you couldn't get three bright engineers in a garage to build the same thing for $200,000," she said.

But Saikat Chaudhuri, a professor at the University of Pennsylvania's Wharton business school, took a different tack. He said eBay's move was little surprise given the recent activity in the VoIP sphere, including the unveiling of Google Talk and start-up acquisitions by Yahoo and Microsoft.

eBay is "acquiring all capabilities and market presence through this acquisition in that space," Chaudhuri said. "It sends a very strong signal to the market that they're no longer satisfied being confined to a very specific domain. I don't think they had much choice, to tell you the truth; either do this thing in a big way, pay a lot of money for it, or leave it."

Reuters contributed to this report.