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eBay Sells Skype, Keeps Minority Stake

eBay Sells Skype
eBay today agreed to sell its Internet phone unit Skype for $1.9 billion while retaining a 35-percent stake in a deal expected to close in the fourth quarter of this year.

The online e-commerce giant is selling Skype to a group of investors led by Silver Lake that also includes Index Ventures, Andreessen Horowitz and the Canada Pension Plan (CPP) Investment Board. The new owners will have a 65-percent stake in the VoIP company.

eBay (NASDAQ: EBAY) is expected to receive approximately $1.9 billion in cash upon the completion of the sale and a note from the buyer in the principal amount of $125 million.

John Donahoe, eBay's CEO, reiterated comments he made earlier in the year when the company admitted that though eBay paid $2.6 billion for Skype in 2005, the unit was not complementary to eBay's core e-commerce business -- rather, it was a promising standalone entity.

"This is a great deal, unlocking both immediate and long-term value for eBay and tremendous potential for Skype," Donahoe said in a statement. "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."

"Skype is a strong standalone business, but it does not have synergies with our e-commerce and online payments businesses," he said. "As a separate company, we believe that Skype will have the focus required to compete effectively in online voice and video communications and accelerate its growth momentum."

In April, eBay announced plans to separate Skype from the company, beginning with plans for an IPO in 2010. The decision followed a year-long review of Skype within eBay's portfolio, but, as it prepared for an IPO, the company said it would also consider bids for Skype that offered an attractive valuation.

Now, Donahoe said eBay has achieved its goal "of delivering short- and long-term value to eBay and its stockholders, without the possible delays and market risk of an IPO."

"Selling Skype now at this great valuation, while retaining an equity stake, makes sense for the company," he added. "And it allows us to focus all of our energies on the opportunities in front of PayPal and eBay."

The news caps a series of positive developments for the VoIP firm. Since eBay appointed Josh Silverman to serve as the unit's head last year, Skype has rolled out a number of significant software upgrades to improve video and calling quality, introduced the popular Skype for iPhone app and forged partnerships in the mobile sector with Nokia and other mobile companies.

In 2008, Skype generated revenues of $551 million, a 44 percent increase compared to 2007. Registered Skype users reached 405 million by the end of 2008, a 47 percent increase from 2007.

For Skype and its new owners, the deal is aimed at giving the firm the room it needs to see further growth.

"This transaction benefits all parties involved and will allow Skype the opportunity to accelerate the growth of its business by harnessing the deep technological and company development expertise that resides within the investor group," Silver Lake Managing Director Egon Durban said in a statement. "Josh Silverman has done a strong job leading the company and we look forward to working with Josh and his team to grow the Skype franchise."

Silverman, writing in a blog post, added that the sale "means we're back to being a fully independent company again, but with a new group of owners who believe passionately in our mission and in the ability of our team to deliver on it. I can't wait."

The deal also marks a new chapter in the spat between eBay and Skype's founders. Rumors earlier this year indicated that the firm's creators, Niklas Zennstrom and Janus Friis, approached potential investors earlier this year in an attempt to make a bid for their old company.

Meanwhile, eBay and Joltid, the company backed by Zennstrom and Friis, are locked in a legal tussle in a British court over ownership of the core peer-to-peer technology behind Skype. The case is due to be heard by a British court next year.

eBay and Silver Lake had not immediately returned calls seeking comment on how the Joltid court case will impact today's deal.

Vanessa Alvarez, an analyst at Frost & Sullivan, said the deal means Skype can start to focus on expanding into the enterprise.

"This is prime time for Skype to be an independent company," Alaverez said in an e-mail to InternetNews.com. "A leader in the consumer VoIP space, the next level is to move from consumer to enterprise, and Skype has already made inroads."

"With its Skype management in place and enough resources to innovate, there is no reason why Skype couldn't begin to gain mindshare in the SMB and mid-market segment."

In regard to the legal issues surrounding the VoIP firm's core P2P technology, Alvarez suggested that perhaps eBay may drop the matter, given the amount of money involved in the sale.

"Honestly, given the premium price fetched in this deal, I would say that some of that is 'padding' to make that legal issue go away," she said.

Update adds comments from Alvarez.