eBay Sells Skype for $1.9 billion

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San Jose-based eBay Inc. has unloaded Skype Technologies — the world leader in Internet telephony that in recent years morphed into a white elephant for the online payments giant — ahead of schedule and at a much richer price than expected.

eBay said today it has reached an agreement to sell a 65% stake in Luxembourg-based Skype to a consortium of investors including the Canada Pension Plan (CPP) for $1.9 billion. The investor group is led by private-equity firm Silver Lake, with $13 billion in assets under management and offices in Menlo Park, London and Hong Kong. Private-equity firms Index Ventures and Andreessen Horowitz, a venture capital startup co-owned by Netscape founder Marc Andreessen, are also partners in the transaction. eBay will continue to own 35% of Skype under a deal that values the web telephony firm, which has more than 405 million customers worldwide, at $2.75 billion.

At that price the surprise sale is a major victory for eBay, and to some degree silences critics who argued the company made a huge mistake when it paid $2.6 billion for Skype in 2005. Those detractors were proved right when eBay took a $1.4 billion charge against Skype two years later, admitting it was unable to tap into synergies it had hoped would vault its business to a new level of online dominance.

"The price is high but not ludicrous," said Toronto-based telecom analyst Duncan Stewart of DSAM Consulting, referring to the deal. "Skype is creating innovative disruption in the global telecom industry, that's what interests the new owners." He added he didn't find it unusual that the CPP Investment Board, the investment branch of Canada's $105.7 billion federal pension fund, partnered in the deal, noting its stake is likely first or second in size. The CPP has a significant exposure to the global telecom industry and has worked with Silver Lake on previous deals.

Earlier this year eBay announced plans to take Skype public with an IPO in the first half of 2010. That announcement was read by many as a sign that eBay had given up on Skype, and was open to discussing any acceptable offer. eBay originally believed there was a natural fit between its online business and Skype, whose software makes it possible for long-distance calls to be made over the Internet free of charge. Now it's a minority shareholder no longer responsible for Skype's financial health, but is still a large enough player to benefit from any future upside.

Skype, co-founded by Sweden's Niklas Zennstrom, reported revenue of $551 million in 2008, mostly from its SkypeOut service that charges users a discounted fee for making calls to fixed line and mobile phones. However the company is almost certainly not profitable.

The challenge for the Silver Lake led consortium will be to figure out how to grow Skype profitably. Andreessen, whose Netscape search engine dominated cyberspace until Yahoo! and Google came along, said the plan is to build Skype into a "core Internet franchise at huge scale." There is no doubt the new owners have big plans on the drawing board, but whether Skype's independent-minded core market will respond favorably to a new business model whose intent is to turn a profit is uncertain.