Hey, eBay Actually Did Ok With Skype

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eBay bought Skype in September 2005 for $4.1 billion. Today they sold 65% of it for much less, valuing Skype at $2.75 billion. It seems like a big loss, and guys like Om Malik are saying eBay shareholders should be angry.

I’m not going to argue with the fact that eBay was negligent in buying a company without taking control of its core intellectual property. But when I look at this deal, and how the market has changed in the last four years, it looks to me like eBay made out ok. Or even more than ok.

First of all, eBay never paid the full $4.1 billion for skype. 2/3 of a $1.5 billion earnout wasn’t paid, so the total purchase price was around $3.1 billion. After the write-downs, eBay was carrying Skype on its books at a value below $2 billion dollars.

Skype is projected to make $200 million of so in EBITDA in 2010, so today’s acquisition implies a 14x multiple on that EBITDA (thanks to Mark Mahaney at Citi Investment Research for the quick financial analysis). Mahaney says “From a non-strategic buyer, that would seem to be a high multiple.” Clearly, ebay got more for Skype than they thought they would.

Also, the market (and eBay) hasn’t done too well over the last few years. Half of the original purchase price was paid in eBay stock, which has declined by more than 50% since late 2005.

Finally, Skype has been profitable, and eBay has taken those profits off the table. Skype was likely breakeven in 2006, says Mahaney. But he estimates they generated $44 million in cash flow in 2007, $116 million in 2008 and projected $164 million in 2009. That’s $324 million eBay has taken off the table in aggregate.

The market is way, way down and Skype is a somewhat damaged asset with the IP litigation ongoing. The fact that eBay is getting most of its purchase price back, in cash, is a big win for them. And they still own 35% of the company and can get additional gains in a later IPO or sale. And the best news is that Skype is finally free of the dragging effect of a huge corporate parent. They can now move forward and find their destiny.

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