eBay Selling Skype - Good Move

There have been rumblings that eBay Inc. (EBAY - Analyst Report) would finally unload Skype, its Internet phone service provider. On April 14, eBay made it official.

The company announced that it plans to separate from Skype with an initial public offering (IPO) scheduled for the first half of 2010. Skype is eBay's fastest growing business segment. In 2008, Skype generated revenues of $551 million, up 44% from 2007, and segment margins of about 21%. Skype had 405 million registered users at the end of 2008, up 47% from 2007. eBay expects Skype to top $1 billion in revenue in 2011.

Interestingly, that announcement came shortly after Skype's founders and group of private equity firms reportedly made eBay an offer to buyback Skype. According to The Wall Street Journal, the private equity backed offer is well below what eBay hopes to get for Skype.

Hmmm, maybe the company's IPO announcement is a negotiating tactic to drive up the private equity offer. Clearly, eBay has a minimum asking price in mind. eBay bought Skype in 2005 for $2.6 billion and paid another $500 million in earnouts.

In 2007, however, eBay wrote down the value of Skype to $1.7 billion, taking a hit of $1.43 billion to its book value. eBay wants to avoid another write down, which means it needs to pull in at least $1.7 billion in a Skype sale.

This news begs the question as to why eBay would want to sell a fast-growing business that appears to be gaining momentum. eBay's president and CEO, John Donahoe, best answered that question: "[I]t's clear that Skype has limited synergies with eBay and PayPal."

Agreed. Selling Skype and focusing on the core auction business and PayPal is a smart move.