Marcus Cake

I am sure that you have heard about the acqusition of Skype by EBay. There is extensive commentary on the internet and I do not plan to reproduce that content here. An good article from CNet is available here. I would like to highlight the valuation paid for this company and identify an alternative path that may have yielded greater value for EBay shareholders.

“Ebay will pay Skype US$1.3 billion in cash and $1.3 billion in stock to the global communications company. If Skype meets certain performance hurdles by 2008, EBay will pay an extra $1.5 billion. The total paid for the company could be US$4 billion.”

Skype expected revenue of US$60m in 2005 and forecasts revenue of US$200m in 2006. The company is yet to earn a profit. The amount paid by EBay (measured as a multiple of price paid over sales) represents a significant premium over typical aqusitions. The premium could not be justified by expected growth or profitability.

The rationale for the acquisition included a belief that adding voice functionality to EBay may mean that EBay could be used for higher value consumer transactions. A move toward higher value transactions must be an imperative for EBay. Higher value should result in higher commission. The internet has been used to deliver product or service information and identify the place of purchase for high value items. The transaction itself has generally been left to one on one contact from a physical location close to the customer. However, higher value markets have not yet, traditionally, been transacted over the internet. Inevitably, perhaps, many of these transactions will be conducted entirely over the internet.

Independently, of whether these high value transactions will be transacted over the internet, I agree with many commentators that voice functionality could have been added to Ebay at significantly less cost. It is unlikely that the Skype user base will become EBay users, simply because Ebay owns Skype. Perhaps, EBay should have applied the purchase price to establishing their own VOIP service with the balance devoted to building a market place for high value transactions and services. The EBay user base would given them a great start. If a VOIP user base is valued so highly, perhaps the initiative would have further increased shareholder wealth. Additional funds could then be devoted to building a high transaction value market.

This may be a sign of things to come. There may be further acquisitions at unjustifiable valuations. Perhaps, there will be another technology boom focussed on a specific set of technologies and markets …