EBay to break Skype connection

EBay Inc., long criticized for its high-priced purchase of Internet phone company Skype, is finally getting out of a marriage that was a mismatch from the start.

The online auction company said Tuesday that it would sell 65% of Skype to a group of private investors led by Silver Lake in Menlo Park, Calif., for $1.9 billion in cash plus $125 million to be paid later. EBay would retain the remaining 35%.

The deal, which is expected to close in the fourth quarter, valued Skype at $2.75 billion -- a good bit less than the $3.13 billion EBay paid in all for its 2005 acquisition.


But analyst Jeffrey Lindsay, who in the past has roasted EBay for buying Skype, said the new deal was a vindication for the auctioneer.

“I think it’s safe to say that EBay’s management managed to turn Skype into a proper business,” Lindsay said.

In the second quarter, Skype had sales of $170 million, according to EBay’s earnings report, a boost of 25% over the same period last year.

The deal trumps EBay’s previous plan, announced in April, to spin off Skype in an initial public offering.

“This deal achieves our goal of delivering short- and long-term value to EBay and its stockholders without the possible delays and market risk of an IPO,” EBay Chief Executive John Donahoe said.

The founders of Skype, Niklas Zennstrom and Janus Friis, had reportedly tried to put together a bid for the company, but they were not among the investors announced Tuesday.

A famous figure in Internet history, however, is involved. Marc Andreessen, who co-created Mosaic, the first widely used Web browser, and then went on to co-found Netscape Communications Corp., is part of the group buying the majority stake in Skype.

This year, he and fellow engineer Ben Horowitz started investment firm Andreessen Horowitz.

Other investors include the European venture capital firm Index Ventures and the Canada Pension Plan Investment Board.

Skype was launched publicly in 2003 as a service that could be used to make free computer-to-computer voice calls over the Internet. It’s popularity exploded mainly by word of mouth -- Skype didn’t advertise -- and the service quickly gained millions of regular users.

In buying the company, then-EBay Chief Executive Meg Whitman said it would be used to enable sellers and bidders on the auction site to discuss transactions.

“That proved to be a complete fantasy,” Lindsay said.

He said that EBay bought Skype and other companies at a time when growth in its core business was showing signs of softening.

“Instead of addressing that problem properly,” Lindsay said, “they went on a buying spree of high-growth businesses to bolt on.”

In 2007, EBay took a $900-million write-down on Skype, admitting it had overvalued the company.

Whitman stepped down as chief executive last year and, this year, announced her candidacy for the Republican nomination for governor of California.

Lindsay credited Donahoe and other current managers at EBay for increasing Skype’s revenue by emphasizing its use for paid calls to landline phones.

By selling 65% of the company, he said, EBay could concentrate more on its core business while retaining a sizable investment.

“They will get a lot of the upside if Skype continues to grow,” Lindsay said.

EBay shares fell 46 cents to $21.68.