EBay to Buy Skype for $4B

SAN FRANCISCO – EBay Inc. (EBAY) has agreed to buy the fast-growing Internet start-up Skype (search) in a move to add free Web telephone calls to its online auctions and fuel growth, the companies confirmed on Monday.

EBay said it plans to pay $1.3 billion in cash and $1.3 billion in stock for the Web communications company. It would make a further payout of up to $1.5 billion by 2008 or 2009 if financial targets are met, giving the deal a total value of up to $4.1 billion, executives of the two companies said.

EBay is renowned for an Internet business model linking millions of buyers and sellers, but its core U.S. market is maturing, slowing to annual growth of between 20 percent and 30 percent a year, compared with 50 percent international growth.

Skype, which said it expects revenue of $60 million this year and more than $200 million in 2006, has raced to the lead in the booming voice-over-Internet (VOIP (search)) market, which is being aggressively targeted by online powerhouses like Yahoo (YHOO), Google (GOOG) and Microsoft (MSFT).

In just two years, Skype has attracted 54 million members to its free Internet-based voice service and is on pace to roughly double in size within a year.

Skype, whose software allows consumers to make free or low-cost phone calls anywhere in the world via the Internet, would be the biggest acquisition so far for 10-year-old eBay.

"We are really buying a new business," eBay Chief Financial Officer Rajiv Dutta said in a phone interview.

He drew parallels to eBay's expansion into online payments with its $1.5 billion acquisition in 2002 of PayPal, which drew initial criticism as a bid to compete in the banking business but thrust eBay into the lead of the online-payment market.

"Is eBay diverting from its core business?" Dutta asked of Skype. "Nothing could be further from the truth."

PayPal is on track for $1 billion in sales in 2005, Dutta noted. "We see the same kind of opportunity here with Skype."

Luxembourg-based Skype offers a free service when users make computer-to-computer calls to other Skype users. Charges apply when Skype users make calls to regular phone numbers.

But in a move to strengthen the bonds between eBay buyers and sellers, the company will also encourage eBay merchant sites to use Skype software to allow customers with last-minute sales questions to click to talk to a customer service agent.

Executives of the two companies justified the combination by saying that the power of so-called "click-to-call" services to convert shoppers into buyers represents a far more lucrative form of selling proposition than advertising can. Skype also plans to add video calling and other features to its software.

"Once we integrate communications into e-commerce, we think that (Skype) is going to remove considerable friction" from the buying and selling process, Dutta said.

Nearly half Skype's users live in Europe, a quarter are in Asia and an eighth are in North America, providing eBay with a large immediate audience as it seeks to expand outside of its core North America market where rapid growth is stabilizing.

The deal is expected to complete in the fourth quarter.

Skype expects to generate $60 million in revenue this year and more than $200 million during 2006, Skype's Chief Operating Officer Michael Jackson said in a joint interview with Dutta. The company has yet to post a profit, he said, adding that business users account for 25 percent of Skype's audience.

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 eBay's profitability, Dutta said.

EBay must convince analysts and investors that the deal is necessary to stoke new streams of revenue growth and is worth the multibillion-dollar price paid.

"We have some very high goals...related to active users, gross profits and revenue," Dutta said. "(The goals) would translate into very significant value creation for eBay," he added, though he declined to spell out the targets.

While allowing potential benefits from providing communications services between buyers and sellers, particularly in China, Goldman Sachs analyst Anthony Noto said in a note to clients on Friday that a licensing partnership could accomplish this without requiring eBay buy Skype.

"We struggle to see enough of a benefit to the marketplace from offering this service to get a sufficient return on a potential multibillion-dollar price tag," Noto wrote.

As of October 2004, Skype had raised $24 million from several private equity firms including Mangrove Capital Partners, Draper Fisher Jurvetson, Bessemer Venture Partners and Index Ventures.

"It may be that all the pieces add up for eBay into a new line of business," Kelsey Group analyst Greg Sterling said in an interview before the merger was confirmed. "It really seems like a big departure for eBay."