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E Bay acquisition of Skype

Group 2

The Story - EBay
‡Founded in Silicon Valley by Pierre Omidyar in 1995 ‡Initially called Auction Web ‡In 1996, Feedback Forum was introduced to eliminate problems like fraud and cheating. ‡ Online bulletin boards were also introduced to guide fellow or new users. ‡Jeff Skoll joined the business as the company¶s president in 1996, the same year in which it was incorporated as eBay ‡In 1997, it was one of the most visited sites on the internet, with more than 150,000 users (in mid 1996, only 5000 users)

‡ In 2003 and 2004, eBay strengthened its presence in growing overseas markets like China, Korea and India, through select acquisitions ‡ In 2002, acquired 33 percent stake in EachNet, a leading Chinese auction site, for US$30 million ‡ In 2003, acquired 67 percent stake in EachNet, for US$150 million ‡ In August, 2004 , acquired Baazee.com., Indian auction website for US$ 50 million ‡ In June 2005, eBay bought shopping.com (provides price comparison services for goods sold on the web) for US $620 million in cash

Synergies
‡ ‡ Operational Synergies ² The best of both EBay and Skype The culmination would increase the scope and reach of both companies Expected improved Financial performance (as had happened when they acquired PayPal) Both could pursue entirely new lines of businesses ² Ecommerce communications could be monetized
‡ Skype ² EBay ² PayPal

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Value creation for customers of both companies ‡ Accessibility ‡ Effortless communication ‡ Easy payment ‡ Lesser transaction time

What was in it for EBay?
‡ ‡ Foremost: Entry into the VOIP market Identified Skype as a fast growing enterprise in this field ² with over 150000 members subscribing each day Email messages to Direct calling between buyers and sellers, for which sellers would pay a fee to avail the facility Addition of Skype was expected to bring new ideas & expertise to fuel EBay's slow growth Stronger enterprise able to compete with giants such as Yahoo and Google Access to markets where EBay was not prominent and Skype was. Such as China, India, Japan and Russia. Customers could learn about EBay through Skype. Skype would complement EBay and PayPal, thereby fitting into EBay's overall value position

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What was in it for Skype?
‡ Skype, although acquired, could still retain individual identity ² Pursue its business under its own brand ‡ Huge member community base and they entered the deal when the market was hot ‡ EBay seemed most suitable fit in terms of autonomy ‡ Stronger base in the US market ‡ Skype was keen to grow through acquisitions ² EBay offered the best deal ‡ Stronger force to face growing competition in the VOIP field

Current Scenario
‡ EBay announced that it would sell 65% stake of Skype on September 1, 2009. Synergies of better buyer and seller communication did not materialize EBay did not make any proper marketing efforts Some critics believed that EBay paid too much to acquire Skype. (2.6 bn for a company that only made 7 mn USD in revenues) In 2007, EBay took a 1.4 bn USD write down Belief that Skype would have been better off on its own as the acquisition did not add any value PayPal remains the saving grace with an increase in revenues of 11% to 299 bn USD in the second quarter of 2009. ‡

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Deal Structure
‡Two tiered ‡Immediate purchase price of USD 2.6 billion ‡Also, a performance based earn-out was negotiated | additional USD 1.7 billion | ‡Shareholders representing approximately 42% of the Skype shares ultimately chose to receive a single payment in cash and eBay stock at the close of the transaction. ‡Shareholders representing the remaining approximate 58% of the Skype shares chose to receive a reduced up-front payment in cash and eBay stock at the close plus potential future earn-out payments. ‡Key Skype personnel had to commit to work for the newly formed eBay subsidiary for the next few years

Reactions
‡Mixed ‡EBay shares fell nearly 4% ‡Synergy & core competency were questioned ‡The best thing about the whole deal is that eBay didn't damage the company.

Critically analyze eBay¶s growth through its various acquisitions. Did these have any impact on the deal with Skype?

Strategic Acquisitions
‡ eBay started acquiring companies in 1998 to expand their online auction business. ‡ They made few acquisitions that are really helpful for growth of ebay like Paypal, baazee, bill point, auction house etc. ‡ They expand their business in almost dozens of countries by acquiring baazee in India, ibazar in France, Eachnet in China etc.

Impact on the deal
‡ Skype was expected to bring growth, increased customer base and diversification in online business by this deal. ‡ But the growth has been slowed down by these huge paid deal. ‡ There was also a threat to Skype from different countries. ‡ Since it is affecting the revenue of telecom sector. Ex: CHINA

Does the acquisition of Skype make strategic sense to eBay?
‡ Skype will accelerate commerce on eBay ‡ Skype opens up new lines of business, new monetization models, new geographies ‡ A great standalone communications business ‡ eBay + PayPal + Skype = Unparalleled ecommerce and communications engine

‡ EBay could enter into VOIP business. ‡ Amount of messages exchanged was very high. ‡ Voice bargaining between buyer and seller by using Skype me button.

Skype s growth

Do you think eBay succumbed to the hype around Skype & paid a high price? Justify your answer?

The answer is yes. eBay had overpaid in order to snap up Skype before Yahoo or Google did. They paid a higher premium in relation to the benefit received. Also, the deal was not worth 2.6 US$ billion as the technology of Skype was not hard to replicate & the entry barrier for competitors was extremely low.