Hedge Funds

Icahn’s War of Words With eBay

It's a fight that pits Wall Street against Silicon Valley.

One of the sharper business battles in recent weeks has been playing out between Carl C. Icahn, the activist investor, and Marc Andreessen, the entrepreneur turned technology investor.

The war of words stems from Mr. Icahn's campaign against eBay, the online auction company, to spin off its fast-growing PayPal electronic payment unit.

Mr. Andreessen, long considered Silicon Valley royalty because he co-founded Netscape and was an early investor in Facebook, has come under attack from Mr. Icahn for his role as a board member of eBay.

(Read more: CarlIcahn criticizes eBay—again)

Mr. Icahn has accused him of various conflicts of interest, calling him "clueless about corporate governance." EBay's chief executive, John J. Donahoe, has also become a target, whom Mr. Icahn described as "either incompetent or negligent."

Carl Icahn (L) and Marc Andreessen (R).
CNBC (L) | David Paul Morris (R) | Getty Images

Mr. Icahn asserts that eBay's decision to sell Skype in 2009 for $2.75 billion to a group of investors that included Mr. Andreessen's venture capital firm represented a conflict and a breach of duty to shareholders. Mr. Andreessen fired back that he had recused himself from the decision to sell Skype.

The investor group that acquired Skype, which was led by the investment firm Silver Lake, turned around less than two years later and sold the business for $8.5 billion to Microsoft. That has led to a lingering question: Why did eBay sell when it did?

Mr. Icahn has suggested that Mr. Donahoe and the board were pressured to sell Skype by Mr. Andreessen, who Mr. Icahn contends knew that Microsoft was waiting in the wings to buy what it saw as a valuable asset at a much higher price.

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If only it were that juicy. The real story is more complicated, and perhaps sadly for the conspiracy theorists, less nefarious.

First, a little history: EBay acquired Skype in 2005 for about $2.5 billion. Skype, the online chat service, was such a mess — and such a bad fit with the bread-and-butter auction business of eBay — that the company wrote down $1.4 billion of the investment in 2007. By 2009, Mr. Donahoe, a former Bain & Company consultant, decided Skype was a distraction and should be sold or spun off.

However, given the postcrisis recession and a major lawsuit hanging over Skype from its founders that involved some of the company's key intellectual property, few buyers emerged. I covered the auction and distinctly remember the lack of interest from most of Silicon Valley.

(Read more: EBay is worst-run company I have ever seen: Carl Icahn)

Carl Icahn: eBay doesn't want discipline

Enter Silver Lake, with its $2.75 billion bid. To induce Silver Lake to buy Skype, eBay agreed to cover 50 percent of the losses resulting from the lawsuit from Skype's founders. Further, eBay agreed to hold onto a 30 percent stake in Skype so that it would participate in the upside — or downside — of the business into the future.

At the time, Joe Nocera wrote a column in The New York Times suggesting the price tag that Silver Lake was paying was high: "Many people on Wall Street — and a number of telecommunications experts I spoke to this week — were stunned by the price Skype sold for, and not just because we are in the middle of a recession."

A little over a year and a half later, with the economy getting a bit better and after a settlement was reached with Skype's founders to end the litigation, Microsoft paid an astonishing $8.5 billion for the company, which included eBay's stake. (Microsoft had originally passed on the acquisition because of legal issues.)

Today, with the benefit of hindsight, Mr. Icahn argues that eBay mismanaged the sale, and shareholders lost out on roughly $4 billion that went to the Silver Lake consortium, which included Mr. Andreessen's firm.

There is no question that, by default, eBay would have benefited by waiting another two years to sell the business and settling the litigation itself. But it is hard to argue in good faith that eBay somehow knew that the business was worth more than the market at the time and still went ahead with the sale mainly to enrich Mr. Andreessen.

Perhaps forgotten in the back-and-forth between Mr. Icahn and eBay is this: From the time the company signaled its intent to divest Skype until the sale to Microsoft closed, eBay's market value jumped by $29 billion, or 195 percent, in no small part because investors believed that the company had refocused itself on the right priorities. While eBay may be short $4 billion, in truth, the amount was more than made up by the increase in the company's market value.

So did Mr. Andreessen have an undue influence on the board's decision to sell Skype to the investor consortium? By all accounts, the answer is no.

That's not to say that a company selling a business to a group of investors that includes one of its board members should be applauded. It raises all sorts of questions that could have been avoided if Mr. Andreessen had recused himself from being part of the investor group that bought Skype as opposed to a board member involved in a critical decision for eBay's future.

(Read more: EBaytells shareholders to vote no on Icahn)

Silver Lake approached eBay long before Mr. Andreessen was ever invited to be part of the bidding group — and his firm, Andreessen Horowitz, invested only $50 million in the deal — so it was hardly necessary for him to participate in the deal the way he did.

Sadly, the debate over Mr. Andreessen's role is obscuring a larger and more important debate: Should PayPal continue to be part of eBay, or would it be more successful separately?

Mr. Icahn may be a bit of Luddite, but when it comes to investing, he has a hot hand. And he has a powerful and unlikely backer of his idea: Elon Musk, the entrepreneur who helped co-found PayPal and now runs Tesla and SpaceX.

"It doesn't make sense that a global payment system is a subsidiary of an auction website," Mr. Musk told Forbes magazine. "It's as if Target owned Visa or something." Mr. Musk also argued that PayPal "will get cut to pieces by Amazon payments or by other systems like Apple and by start-ups if it continues to be part of eBay," he said. "It will either wither or be spun out … Carl Icahn can see it, and he's not exactly super tech-savvy."

Another view takes the opposite tack. Reid Hoffman, the founder of LinkedIn and a former PayPal executive, backs eBay's view that PayPal is worth more as part of the company than separated, especially given the powerful trends among its competition.

"Amazon is a commerce platform with its own payments system. Google has a commerce platform and a payments system. Apple has the capacity to leverage its commerce platforms (iTunes, App Store) and its hardware into a closed-loop commerce system that would let users pay for online and offline purchases using their iPhones," he wrote on LinkedIn. "Square has allied with Starbucks because it needs large commerce partners to feed it transactions to process."

Whatever the right answer about whether eBay and PayPal should remain together or be separated, there are valid arguments on both sides. Perhaps a breakup is inevitable over the long term. In the meantime, let's keep the debates on the facts.

By CNBC anchor and New York Times reporter Andrew Ross Sorkin