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eBay, Skype Founders Settle Fight

eBay Sells Skype
Skype's founders have reached an agreement with eBay today that clears the way for the e-commerce giant to sell the popular VoIP firm to private investors while giving the two founders a stake.

The deal ends the debate at the heart of Skype founders Niklas Zennström and Janus Friis' lawsuit against eBay (NASDAQ: EBAY) and Skype's would-be buyers. The two had argued that eBay had infringed on their copyright by wrongfully using Skype's core technology, which they at one point had licensed to eBay through their company Joltid.

Now, the settlement specifies that Skype retains ownership over all software that it had previously licensed from Joltid.

In addition to settling Joltid's case against eBay, it also extinguishes all pending litigation against Silver Lake Investor Group, which had also been named in the suit and which leads the investor group that had inked a deal to purchase Skype from eBay.

In return for dropping the suit, Joltid, Zennström and Friis will join the group of Skype's new owners, "contributing Joltid software and making a significant capital investment," according to a statement issued by eBay.

The founders and their company will receive a 14-percent share of ownership in Skype, which means Silver Lake and other investors -- Andreessen Horowitz and the Canadian Pension Plan Investment Board -- will jointly own a 56-percent stake.

That leaves eBay with 30 percent, 5 percent less than the initial amount it sought when it agreed to sell Skype to Silver Lake and the others.

Retained from the original sales agreement are its financial terms: eBay will be paid $1.9 billion by the group of investors when the deal closes, with $125 to be paid later.

The sale thus continues to value Skype at $2.75 billion, and is expected to close by the end of the year.

eBay bought Skype in 2005 for 2.6 billion, but the two founders retained ownership of its underlying peer-to-peer technology, which they licensed to eBay. However, eBay's striking of a deal to sell the unit -- and its technology -- kicked off a tumultuous and litigious working relationship.

The settlement marks the end of a long legal tussle between eBay and Skype's founders, involving suits and counter suits filed suits against each other over the licensing of core technology used in the VoIP service. Now, those involved say they can get back to the business of maximizing Skype's potential.

"Skype will be well positioned to move forward under new owners with ownership and control over its core technology," eBay CEO John Donahoe said in a statement. "At the same time, eBay continues to retain a significant stake in Skype and will benefit from its continued growth. We look forward to closing the deal and focusing on growing our core e-commerce and payments businesses."

Meanwhile, Index Ventures -- another one-time participant in the Silver Lake-led investor group -- is out of the picture.

Mike Volpi, a partner at Index and former CEO of Joost, another firm founded by Zennström and Friis, had become became another legal target of the two. While launching their lawsuit to halt the Skype sale, Zennström and Friis also sought an injunction against Volpi, seeking to stop him from using confidential information he learned at Joost in negotiations to buy Skype.

In a statement, Index Ventures washed its hands of the whole mess.

[cob:Special_Report]"We are pleased that Skype will now be able to put litigation behind it, and we wish [Skype President] Josh Silverman, his team and the Skype investors well in continuing to grow a great business. Danny Rimer, a partner at Index, said in a statement. "Although Skype has the potential to be a great investment, the deal terms changed for Index such that it no longer matches our investment criteria and thus we have decided not to participate in the transaction."

Rimer did not elaborate on what he meant by changed terms.

During eBay's last earnings call, Donahoe reassured investors that the Skype deal would be completed by the end of the fourth quarter, prompting analysts to laud him for orchestrating the sale.

"You have acknowledge that Donahoe delivered, he laid out a plan for turning around eBay, he stuck to it, he executed it, and then he went out and got a good price for Skype," Colin Gillis, analyst at Brigantine Advisors, told InternetNews.com.

When it initially bought the VoIP firm, eBay had said it believed Skype would help buyers and sellers communicate while making online purchases at the site. But it eventually found that the VoIP service wasn't complementary to its core e-commerce business. So, though it forecast Skype to double revenue by 2011, eBay sought to spin it off -- first through an IPO, but later reversed course and struck a deal with Silver Lake and other investors.

After all the drama, Skype chief Silverman appears to be happy with the outcome.

"I have some very exciting news to share with you today. In the past couple of days, we and eBay have reached a settlement with Joltid regarding our dispute with them. This has extremely positive implications for us on three critical fronts: We will now have ownership of the software previously licensed from Joltid, so we'll be in control of our technology future. All litigation against eBay, Skype and the investor group ends, so we’ll be free to concentrate all of our efforts on building the world’s greatest communications software.

"Joltid and Skype founders Niklas Zennström and Janus Friis will join the investor group and the Skype board ... so we'll benefit from their expertise, vision and continued commitment to making Skype a long-term success," Silverman said in a blog post. "This is fantastic news for us, clearing the road ahead and making what was shaping up to be an exciting journey, an unbelievable journey."