eBay to Spin Off Skype Through IPO

EBay Inc., under pressure to focus on reviving sales at its main e-commerce site, is planning an initial public offering for the Skype Internet-calling unit in the first half of 2010.

An IPO would be a way for Chief Executive Officer John Donahoe to offload a business that he says doesn’t fit with the rest of EBay’s operations. The exact timing of the offering will depend on market conditions, EBay said yesterday.

Skype handles 8 percent of all cross-border voice traffic, making it the world’s largest provider of international calls, according to research firm TeleGeography. Meg Whitman, Donahoe’s predecessor, bought Skype for $2.6 billion in 2005 with the aim of giving buyers and sellers a way to speak to each other. Even though that goal was never realized, Skype’s sales reached $551 million last year.

“The only problem with Skype is it’s part of EBay,” said Jeff Lindsay, an analyst at Sanford C. Bernstein & Co. in New York. “It’s a marriage made in hell. They will make more money from spinning it out than they ever could by keeping it.”

The IPO could raise $500 million to $1 billion for EBay, depending on how much equity the company gives up, said Paul Bard, an analyst with Renaissance Capital LLC in Greenwich, Connecticut. Skype’s market value could be $3 billion to $5 billion, he said. Goldman Sachs Group Inc. will lead the underwriting.

Skype Me

Skype, a piece of software that lets people make calls and hold videoconferences over the Internet, accounts for about 6 percent of EBay’s sales.

The program, which routes calls over the Internet rather than traditional phone networks, gained global popularity by being among the first to offer high-quality calls for free, said Allen Weiner, an analyst at Gartner Inc. in Scottsdale, Arizona.

Users install the Skype software on their computers and use a headset or Web cam to chat with others. Calling from one computer to another is free. Customers pay per-minute fees when they call mobile phones or regular home phones. Skype also charges for features such as voice mail and text messages.

Skype, which has more than 400 million users, says the service isn’t designed to replace home phones, because users can’t call emergency services. That makes it different from Internet-phone services offered by companies such as Vonage Holdings Corp., which are designed to replace home phones.

EBay, based in San Jose, California, dropped 4 cents to $14.34 at 9:39 a.m. New York time in Nasdaq Stock Market trading. The shares had climbed 3 percent this year before today.

Private-Equity Interest

Skype’s founders, Niklas Zennstrom and Janus Friis, had approached several private-equity firms about buying the company from EBay, the New York Times reported last week, citing people familiar with the matter. Alan Marks, a spokesman for EBay, declined to comment on the report yesterday.

“I don’t think this limits their options in any way of what they could do with Skype,” said Soleil Securities Group Inc.’s Laura Martin, referring to EBay’s management. The Los Angeles- based analyst has a hold rating on EBay shares, which she doesn’t own.

Donahoe is looking to the public markets at a time when demand for IPOs has evaporated. Mead Johnson Nutrition Co., a former Bristol-Myers Squibb Co. unit, was the only IPO by a U.S.-based business last quarter. The company, the world’s biggest maker of baby formula, raised $828 million in February. Last year, 20 companies went public in the first quarter, raising a total of $24 billion.

Filing for an IPO doesn’t prevent another company from swooping in to buy Skype, said David Menlow, president of IPOFinancial.com in Millburn, New Jersey.

Other Options

“If the company that’s coming public is viewed as undervalued, then it’s a possibility the deal could be canceled,” Menlow said. EBay could strike a deal with a private-equity firm or another buyer if the price is right, he said.

KKR & Co., the buyout firm run by Henry Kravis and George Roberts, considered backing a proposal by Skype’s founders to buy back their company, the Wall Street Journal reported this week, citing people familiar with the situation.

“It is clearly our intent to pursue an IPO,” said EBay’s Marks. “We are not soliciting bids. If somebody submits an offer, we’ll take a look at it.”

Since taking over a year ago, Donahoe has steered EBay away from some of Whitman’s initiatives. He revamped the main EBay site and overhauled selling fees. This week, EBay sold a service called StumbleUpon, which helps people find Web sites that interest them. EBay bought that business in May 2007 for $75 million. StumbleUpon founders Garrett Camp and Geoff Smith bought back the unit for an undisclosed sum.

Other Bidders?

Analysts have identified Microsoft Corp. and Google Inc. as potential bidders for Skype. EBay is likely to get more money for Skype by spinning it off in an IPO than selling it privately because suitors may be leery of spending too much, said Jim Friedland, an analyst at Cowen & Co. in New York.

“There may have been offers, but at levels EBay deemed too low,” Friedland said. “They haven’t been able to sell at the valuation they wanted and are going with plan No. 2.”

Andrew Pederson, a spokesman for Google, and Frank Shaw, a spokesman for Microsoft, declined to comment.

In 2006, then-CEO Meg Whitman said Skype had “tremendous synergies” with PayPal and EBay’s auction site. EBay wrote down the value of the acquisition to $1.2 billion in 2007, signaling that it had overestimated the unit’s potential.

A spokesman for Whitman, who is running to be governor of California, didn’t respond to an e-mail seeking comment.

Donahoe said in April 2008 that he would spend a year evaluating whether Skype was a good fit for the company.

“Operating Skype as a stand-alone publicly traded company is the best path for maximizing its potential,” Donahoe said yesterday.

Source: Bloomberg

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eBay to Spin Off Skype Through IPO

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