Skype schmuck insurance pays off richly for eBay
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.