Online auctioneer eBay Inc. agreed today to pay at least $2.6 billion in cash and stock for Internet phone provider Skype Technologies SA, confounding many analysts who questioned the lofty price tag and the companies' compatibility.
STOCKHOLM, Sweden — Online auctioneer eBay Inc. agreed today to pay at least $2.6 billion in cash and stock for Internet phone provider Skype Technologies SA, confounding many analysts who questioned the lofty price tag and the companies’ compatibility.
The total value of the deal may climb to $4.1 billion based on whether Skype meets a series of performance targets over the next three years, San Jose, Calif.-based eBay said. It said the acquisition would create “an unparalleled e-commerce and communications engine” for Internet users worldwide.
Low-cost Internet phone providers like Skype are creating upheaval in the telecommunications industry. That’s because Voice over Internet Protocol technology, or VoIP, breaks calls into data packets that get routed over the Internet, which is much more efficient and cheaper than the traditional circuit-switched phone system.
Skype — founded by the creators of Kazaa, the free music-sharing program that riled the music business — gives away software lets people talk for free over the Internet using computers and microphones. A paid version, SkypeOut, allows those calls to be connected to regular phones.
Other big Internet names have expanded their VoIP capabilities lately, including Google Inc., which rolled out a new instant-messaging program with voice service. Last month Microsoft Corp. acquired Teleo Inc., a small startup whose software lets people make calls from computers to traditional telephones.
But some analysts have been skeptical about eBay’s need to own a VoIP provider.
EBay buyers and sellers can communicate with each other via e-mail before a transaction is complete — eBay says about 5 million such messages are exchanged daily. Adding Skype and its voice capabilities will speed the communication between parties and increase the level of trust, said Meg Whitman, eBay’s chief executive.
“It’s instantaneous and private,” she said. “You don’t have the person’s phone number, just a user name, so it protects the privacy of all users.”
She also said Skype would help eBay open “several new lines of business.”
“Communications is at the heart of e-commerce and community,” said Whitman, who had won praise for avoiding deals beyond eBay’s core, marketplace-based strategy, especially during the late 1990s Internet craze. “We will create an extraordinarily powerful environment for business on the Net.”
EBay shares rose 23 cents, or 0.6 percent, to $38.85 in morning trading on the Nasdaq Stock Market.
Niklas Zennstrom, Skype’s CEO and co-founder, will join eBay’s senior executive team. He said the deal will help advance his company’s goal to “revolutionize the ease with which people can communicate through the Internet.”
“When we started Skype, our vision was to create a global communications company,” he said, noting that the company has users in almost every country. “I think the only country we don’t have on the map is North Korea.”
But Ovum analyst Mark Main said he considered the deal “far-fetched” and said eBay could have found cheaper ways to improve its Internet communication abilities.
“EBay could have developed its own sophisticated messaging and communications platform, or even bought one, for far less money than it is paying for Skype,” Main said. “And if eBay is mainly paying for Skype’s user base and brand, that makes this a risky investment.”
Whitman, however, said Skype’s name carries great value with customers, noting that many Internet users have started referring to phoning via their computer as “to Skype someone.”
“When people are using your brand name as a verb, that is incredibly powerful,” Whitman said.
She also said Skype has great market share in places where eBay is not heavily used, such as Japan and the Nordic countries, which may help the online auction company attract more customers.
Skype has 53 million registered users, including more than 2 million who pay for its premium services. Since it was introduced in 2003, the company’s free software has been downloaded more than 164 million times.
In 2004, the company generated about $7 million in revenue, which it projects will snowball to $60 million this year and more than $200 million in 2006.
EBay recently trounced analysts’ expectations by reporting it earned $291.6 million, or 21 cents per share, for the three months ended in June, a 53 percent increase from last year. Revenue totaled $1.09 billion, a 40 percent increase.
Overall, eBay’s community spanned 157 million registered users, up 10 million from March. The company had $3.7 billion in cash and other current assets as of June 30.
But bringing Skype into the fold is expected to cut eBay’s earnings in the short term. EBay projected that the acquisition will reduce earnings per share by 4 cents in the fourth quarter of this year and by 12 cents in 2006.