EBay Sells Bulk of Skype Stake for $1.9B

EBay Inc. is trading control of the online telecommunications service Skype for about $2 billion, reversing a 2005 acquisition that many analysts considered a head scratcher from the beginning.

The company famous for its online marketplace said Tuesday it is selling a 65 percent stake in the business to a group of private investment funds for $1.9 billion in cash and a $125 million note, while retaining a 35 percent stake.

EBay said the deal values the company at $2.75 billion.

EBay said earlier this year that it would spin off Skype, which lets people make free or cheap voice and video calls on computers and cell phones, after struggling to justify its 2005 acquisition of the company for $2.6 billion.

EBay hoped to offer customers the chance to connect more easily and discuss transactions in real time. But those goals apparently went unfulfilled in the ensuing four years, writes Steven Musil of CNET News, a sister site of CBSNews.com.

Signs became clear over the past two years that the acquisition wasn't working out as planned. In 2007, eBay said it would "take a $900 million so-called impairment write-down against the value of Skype, meaning that eBay had been forced to reassess the value of the Internet telephony company relative to its overall business," writes Musil.

The move was a tacit acknowledgment by eBay that it was taking a loss on its original investment.

In 2008, newly announced CEO John Donahoe said it would take a year to evaluate the future of its online phone and video conferencing service.

Still, Skype itself remains popular, particularly among people who regularly make international calls. According to the research group TeleGeography, Skype accounted for 8 percent of international calling traffic last year. The service can typically offer cheaper rates than regular phones by sending voice data over the Internet just like e-mail and Web pages, reducing the need to tie up dedicated phone lines.

It is also starting to look like a more profitable business, with revenue up 25 percent to $170 million in the most recent quarter.

"We think Skype definitely is a viable stand-alone business," Lazard Capital Markets analyst Colin Sebastian said. "It has clear market-share leadership and the margins have turned positive."

For eBay, though, "Skype has been a distraction," Sebastian said. "This allows them to focus on turning around the core marketplace."

Skype was founded by Niklas Zennstrom and Janus Friis, creators of the music downloading service Kazaa, which had riled the recording industry.

EBay announced in April that it would spin off Skype through an initial public offering next year, though the company said it was open to alternative bids that offered attractive valuation. In a statement Tuesday, eBay CEO John Donahoe said the deal with the investor group achieves that.

"This is a great deal, unlocking both immediate and long-term value for eBay and tremendous potential for Skype," Donahoe said. "We've acted decisively on a deal that delivers a high valuation, gives us significant cash upfront and lets us retain a meaningful minority stake with talented partners."

He added that Skype, as a standalone company, would have the focus needed to compete and "accelerate its growth momentum"

The group of investors buying the stake includes Andreessen Horowitz, the new $300 million fund set up by Web browser pioneer Marc Andreessen. Led by the private equity firm Silver Lake, the group also includes Index Ventures and the Canada Pension Plan Investment Board.

EBay expects the deal to close in the fourth quarter of this year.

Shares in the San Jose-based company climbed 13 cents, or 0.6 percent, to $22.27 in morning trading Tuesday.