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EBay Sees $1.4 Billion in Charges on Skype

Reuters
Monday, 1 Oct 2007 | 1:18 PM ET

Skype co-founder and Chief Executive Niklas Zennstrom has stepped down and accepted a smaller payout ahead of schedule as parent eBay wrote down the value of the Internet telephony business it bought in 2005, eBay said Monday.

An Ebay sign is shown at Ebay offices in San Jose, Calif., Wednesday, July 20, 2005. The San Jose-based company said Wednesday that it earned $291.6 million, or 21 cents per share, for the three months ended in June, a 53 percent increase from $190.4 million, or 14 cents per share at the same time last year. (AP Photo/Paul Sakuma)
Paul Sakuma
An Ebay sign is shown at Ebay offices in San Jose, Calif., Wednesday, July 20, 2005. The San Jose-based company said Wednesday that it earned $291.6 million, or 21 cents per share, for the three months ended in June, a 53 percent increase from $190.4 million, or 14 cents per share at the same time last year. (AP Photo/Paul Sakuma)

Analysts said the move could mean eBay was ready to take Skype in a new direction, after the $2.6 billion deal had failed to live up to financial expectations, and was behind in plans to integrate Skype with eBay's auction and PayPal businesses.

Zennstrom wanted to spend more time on new projects and would become Skype's nonexecutive chairman, eBay spokesman Hani Durzy said.

Shares of eBay were up 30 cents, or 0.8 percent, to $39.32 in afternoon trading on Nasdaq Monday.

"Part of this is saying: we want to move Skype in a slightly different direction here," said Pacific Crest analyst Steve Weinstein. He said that Skype's revenue, while growing, is not "where they really wanted it."

"Overall investor sentiment on Skype has been negative," Weinstein added.

EBay did not say specifically how much Zennstrom received but it said in a statement that it paid 375 million euros ($530 million) to some Skype shareholders, out of a possible $1.7 billion under the terms of the 2005 deal.

At the time of the deal, eBay had promised some Skype owners payments based on active users, revenue and gross profit targets for 2008 and the first half of 2009, which could have boosted the total deal value to more than $4 billion.

EBay, which has said it was not fully happy with Skype's performance, announced Monday that it would take a $900 million impairment write-down against the value of Skype.

"It puts this acquisition behind them in terms of transitioning management" and valuing the unit, said Stifel Nicolaus analyst Scott Devitt.

He said eBay shares already reflected a lower value for Skype than the purchase price. The stock hit a year-high of $39.65 earlier in Monday's session.

Zennstrom helped start Skype in 2003. He and the other co-founder, Janus Friis, also started Joost, an Internet television service, earlier this year. They were behind Kazaa, a file-sharing service, which was sold to Australia's Sharman Networks in 2001.

Skype reported its second quarterly profit in a row on July 18 on revenue of $90 million, and had 220 million registered users at the end of June. But eBay CEO Meg Whitman said at the time that she was not happy with Skype usage levels.

EBay said it added 160 million Skype customers in two years. That was likely the basis for Zennstrom's pay-out, according to Pacific Crest's Weinstein.

"(Zennstrom's) receiving part of what he could have ... What that's telling you is that they're on track for some metrics but not all," he said.

EBay said its chief strategy officer Michael van Swaaij will act as CEO of Skype until it finds a permanent successor to Zennstrom.

The company also said Skype President Henry Gomez would return to eBay to become its senior vice president for corporate affairs. He had been senior vice president at eBay during his two years at Skype.

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