The rumors are intensifying by the minute. Update: DONE DEAL !
Check Meg Whitman's statement here (she's EBAY's CEO), the official ebay investor pack (there's a webcast scheduled), a report on the SkypeJournal, and the press release on Skype's site. It's a 50/50 cash/equity deal... More thoughts at the end of the post.
Pierre Chappaz (well connected European entrepreneur) left a note in my previous post that this might be the right rumor. Om points to a number of sources including Marketwatch with details about the deal:
“Ebay was in the final stages late on Sunday night of sealing an agreement to buy Skype, the fast-growing provider of voice calls over the internet, for more than $2.6bn, according to a person close to the situation. The deal, which ends a flurry of takeover approaches from other internet and media companies, could cost as much as $4.1bn, if Skype hits certain performance targets between now and 2008.”
Businessweek says: “ Just got a notice from eBay of an "investor conference call" at 5 a.m. Pacific time, on an announcement to be made two hours earlier. Very unusual practice for eBay. I don't know for sure, but who wouldn't guess that eBay's buying Skype after all?”
I liked Lim’s comment about letting each ebay buyer connect through voice with each seller, but there are probably more synergies in positionning eBay as the indisputed leader of C2C (consumer-to-consumer) services & technology.
And on the funnier side, in the comments of Om’s post:
“ I just though of a new valuation metric: $$$/download (hey its 3am and I’m abit punchy, vbg)
I just now read the article and price as reported is $2.6B, half cash (which is pretty bold).
So at 50m downloads, thats ~$52/download, or ~$26 CASH/download.”
In the meantime, the SkypeJournal says “this deal is an innovation killer”.
Update 2: There are a number of interesting comments in the press release reported by businesswire:
"One of the fastest growing companies on the Internet, Skype already has 54 million members in 225 countries and territories. Skype is currently adding approximately 150,000 users a day and has created a thriving ecosystem of products, services, developers, and affiliates. Skype is considered the market leader in virtually all countries in which it does business. In North America alone, Skype has more users and serves more voice minutes than any other Internet voice communications provider."
"A Powerful Ecommerce and Communications Engine
Online shopping depends on a number of factors to function well. Communications, like payments and shipping, is a critical part of this process. Skype will streamline and improve communications between buyers and sellers as it is integrated into the eBay marketplace. Buyers will gain an easy way to talk to sellers quickly and get the information they need to buy, and sellers can more easily build relationships with customers and close sales. As a result, Skype can increase the velocity of trade on eBay, especially in categories that require more involved communications such as used cars, business and industrial equipment, and high-end collectibles.
The acquisition also enables eBay and Skype to pursue entirely new lines of business. For example, in addition to eBay's current transaction-based fees, ecommerce communications could be monetized on a pay-per-call basis through Skype. Pay-per-call communications opens up new categories of ecommerce, especially for those sectors that depend on a lead-generation model such as personal and business services, travel, new cars, and real estate. eBay's other shopping websites -- Shopping.com, Rent.com, Marktplaats.nl and Kijiji - can also benefit from the integration of Skype.
PayPal and Skype also make a powerful combination. For example, a PayPal wallet associated with each Skype account could make it much easier for users to pay for Skype fee-based services, adding to the number of PayPal accounts and increasing payment volume.
In addition, Skype can help expand the eBay and PayPal global footprint by providing buyers and sellers in emerging ecommerce markets, such as China, India, and Russia, with a more personal way to communicate online. And consumers in markets where eBay currently has a limited presence, such as Japan and Scandinavia, can learn about eBay and PayPal through Skype. Skype can also help streamline cross-border trading and communications.
With its rapidly expanding network of users, the Skype business complements the eBay and PayPal platforms. Each business is self-reinforcing, organically bringing greater returns with each new user or transaction. The three services can also reinforce and accelerate the growth of one another, thereby increasing the value of the combined businesses. Working together, they can create an unparalleled engine for ecommerce and communications around the world."
(sorry for the long quote, but well deserved). Indeed, some of these goals are really nice, but could have been achieved through a tight partnership, not through an acquisition. What is not mentionned here, is that Skype is now not avaiable to other brands (or will it ?) in order to achieve the same goals... Looking at the financial deal, I'm puzzled:
eBay will acquire all of the outstanding shares of privately-held Skype for a total up-front consideration of approximately EUR 2.1 billion, or approximately $2.6 billion, which is comprised of $1.3 billion in cash and the value of 32.4 million shares of eBay stock, which are subject to certain restrictions on resale.
The maximum amount potentially payable under the performance-based earn-out is approximately EUR 1.2 billion, or approximately $1.5 billion, and would be payable in cash or eBay stock, at eBay's discretion, with an expected payment date in 2008 or 2009. Skype shareholders were offered the choice between several consideration options for their shares. Shareholders representing approximately 40% of the Skype shares chose to receive a single payment in cash and eBay stock at the close of the transaction. Shareholders representing the remaining 60% of the Skype shares chose to receive a reduced up-front payment in cash and eBay stock at the close plus potential future earn-out payments which are based on performance-based goals for active users, gross profit and revenue.
My best guess here is that VCs represent the 40% (hard cash is good!) and management took the rest + the earn-out. My first post on Skype was over a year ago, and I remember mentionning that they had taken 40m$ in A- and B- rounds. So if we assume that valuations (it's wrong I know but whatever) for these 2 rounds were roughly the same, the return cash-on-cash in just 2 years for the VCs is:
Invested money: 40m$
Exit price: 40% * 1.3b$ cash = 520m$
CAC = (520-40)/40 = 12x ! that's about a 260% per year ! Home run !
OK the calculation is a bit rough, but VERY nice.
Skype generated approximately $7 million in revenues in 2004, and the company anticipates that it will generate an estimated $60 million in revenues in 2005 and more than $200 million in 2006. For Q4-05, eBay expects the acquisition to be dilutive to pro forma and GAAP earnings per share by $0.01 and $0.04 respectively. For the full year 2006, eBay expects the transaction to be dilutive to pro forma and GAAP earnings per share by $0.04 and $0.12 respectively, with breakeven on a pro forma basis expected in the fourth quarter of 2006. On a long-term basis, eBay expects Skype operating margins could be in the range of 20% to 25%.
Let's look at revenues of 200m$ in 2006. As the division will be an integral part of eBay, I doubt that we'll have the same level of detail then. But it's good to put these statements out this morning, before the opening bell at eBay..
So, 20% of 200m$ (assuming long term is 1,5 years which I doubt), that's 40m$ in net forward earnings.
At a selling price of 2,6b$ + 1,5b$ of earn-out (2 years later, I know) = 4,1b$, that's a forward P/E = ~100 (update: big calculation error with the excitement. Still very high P/E)
100,000 ... What ??? OK, my calculation is wrong, or the synergies, the assets, the brand, the hype, etc. are all well worth this insane price...
Anyways: Niklas, a couple of days after the Kazaa trial, you must have just hit heaven ;)
Update 3: Great analysis by Pierre Chappaz (in French), the former CEO of Kelkoo sold to Yahoo! for $480€. He says that one of the reasons of the race between Yahoo! and Ebay to buy Skype was that they are so much more attuned to corporate development and could understand better their global impact, instead of just looking at it as a technology deal as would have been the case with Microsoft and Google.
On Pierre's blog, one VC says that he also believes that one of the reasons for the acquisition is that top management at eBay might be bored (as business runs smoothly) and might have decided to build up an Internet conglomerate such as IAC... Interesting.
Another great analysis by Jeff Clavier:
"This is a massive deal: eBay is spending about half of its cash reserve to acquire the VoIP company, at a stratospheric multiple (based on Skype’s rumored revenue levels)."
"And even bigger congratulations to Skype employees, who in 2.5 years have disrupted an established market, and are getting an handsome payout. Scoble’s former boss, Lenn Pryor, must be happy to have relocated to Tallinn."
You so bet! I know a few people who joined Google some time before IPO, and they had their stock options granted below the dollar!
"A key learning: after this one, no deal is impossible or unthinkable."
And he reports also: "
- Rich Therani comments on his VoIP blog:
Right now, Skype gets just over a dollar per active user. I am sure eBay thinks – and they are likely right , that Skype will grow its active user base and also grow its revenue per user. So in another 18 months or less we can expect Skype to have 100 million active users and perhaps each will pay an average of $3. This gets us to $300 million.
Of course Skype has its potential problems to deal with. Port blocking in some countries and the declaration that Skype is illegal and a fining offense are obviously not too good for your business model. Still, this is exactly what happened last week in China. Will China become a model for the rest of the world or an isolated incident?”
I've been watching CNBC for 20min. Nothing on this deal. Everything is on hurricane Katrina... Indeed there are priorities, but not on CNBC ! Nothing either on the Hertz LBO... I guess private equity doesn't interest traders that much ;) ?