Skype schmuck insurance pays off richly for eBay

May 10, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Rob Cox

Leave it to Microsoft to make eBay look like a savvy buyer. That’s sort of what the software giant’s $8.5 billion acquisition of Skype has done for the online auction company, which originally bought the Internet telephony group six years ago. EBay has now recouped its whole Skype investment and then some. But don’t credit eBay’s stewardship for the turnaround — consider it an advertisement for “schmuck insurance.”

The term, for those not well-versed in Yiddish or Bankerese, refers on Wall Street to the practice of offloading a business — often at a price seen to be low — while retaining an interest in any upside. This allows the seller to save some face should the acquirer wind up making a fortune on its purchase.

And so it is with eBay and Skype. The auctions-and-payments group bought Skype for $3.1 billion in 2005 under then-Chief Executive Meg Whitman. The proposed synergies, of eBay sellers and buyers conversing over Skype, never materialized. Three years on, Skype was sold at a loss, for $2.75 billion, to an investor group led by private equity firm Silver Lake.

Cognizant of Skype’s rocketing growth prospects — and no doubt aware of the potential for embarrassment when selling to a buyout firm — eBay only sold 65 percent of its stake, for around $1.8 billion. With Tuesday’s Microsoft deal, the piece eBay retained is valued at around $2.3 billion. Tot it up and eBay seems to have made at least a 30 percent return.

By private equity standards, that’s no great shakes. But it’s decent news for eBay boss John Donahoe. The credit truly belongs to Silver Lake, however. The firm looks to have tripled the value of its equity in the deal, which once looked hairy, given copyright squabbles between eBay and Skype’s founders.

Of course, the single greatest thank you note from eBay shareholders should go to the Microsoft managers who wrote the big check. They’re the schmucks who made it all possible.

Comments

Seems like it’s the schmucks who buy Microsoft products who made it all possible. We are Running Linux Ubuntu on this Toshiba Satellite for years without incident. Ubuntu installs quickly and without all the Microsoft registration hassles and pitfalls. No viruses or malware either. Highly recommended, Linux Ubuntu works right out of the box for surfing, Office spreadsheets, writer. Often USB devices can simply be plugged in and are ready to go where Windows struggles looking for drivers.

Posted by Vertigo | Report as abusive
 

It will be interesting to see if Microsoft takes skype in any direction or kills it off. It is already having issues, especially as foreigners recognize that it can kill their telcom industry’s lucrative hold on overseas calling and move to block it, overtly or covertly (i.e. China).

@ Vertigo- if you’re just surfing the web, writing code or running a server Linux is great- but the office software sucks. Really bad. Sorry, it’s the truth- so true that I am on my old machine making a powerpoint with my old Office 2007 rather than use the open office on my new machine. I would rather eat glass than use that abomination.

You get what you pay for, until the 2nd coming of Communism takes off, of course.

Posted by dzoo35 | Report as abusive
 

[...] schmuck insurance paid off mightily for eBay. The online auction association in 2009 sole a infancy tenure of Skype, a Internet-phone company, [...]

 

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