eBay To Spin Off Skype

Bidding starts on the auction site’s biggest ever sale, while Skype starts preparing to spread its wings

Online auction company Skype has decided to spin off the Internet telephony company Skype, which it bought in 2005 for $2.6 billion (£1.75 billion). The move is believed to be the first step towards an outright sale, which some suggest could even make a profit for eBay.

Although eBay originally promised that Skype would add to its auction service, giving buyers the ability to talk directly to sellers, the acquisition never gelled as well as earlier purchases such as online payments service PayPal. Shares of eBay rose on the news.

Spinning it off would allow Skype to follow up on efforts to break into business telephony and make other partnerships – possibilities that have led to a chorus of demands from shareholders, that eBay end what analysts have described as “a marriage made in hell”.

Skype has continued its growth under eBay’s ownership, and is now the world’s largest provider of international calls, handling eight percent of cross border traffic, according to researcher TeleGeography – but this only provides a comparatively modest $551 million annual sales last year, from 400 million users.

The unit has made important announcements in recent weeks – adding support for SIP, the standard IP telephony protocol used by all other major players, launching a Skype client for the iPhone, and announcing one for Blackberry.
Skype is planning an IPO (initial public offering) of shares in Skype in 2010, but commentators are speculating that this might not happen, due to market conditions, or a better offer.

“It’s a marriage made in hell. They will make more money from spinning it out than they ever could by keeping it,” analyst Jeff Lindsay of Sanford C Bernstein told Bloomberg news.

Analysts suggest the IPO could raise up to $1 billion, depending how much equity eBay sells, and the value of the whole of Skype could be as much as $3 to $5 billion, according to analysts, although it currently has a “book value” of $1.7 billion, and eBay revalued it, admitting that the $2.6 billion it paid was too high. RBC analyst Steven Ju puts the value at $2 billion in a comment to Reuters.

Skype’s founders, Niklas Zennstrom and Janus Friis had approached investors hoping to raise money to buy the company from eBay, the New York Times reported last week.