eBay Slumps After Selling Skype

Shares of eBay (EBAY - Analyst Report) slid 4.8% yesterday morning and failed to recover momentum after the company sold a majority interest in Internet calling services provider Skype.

A group of investors, with the largest being private equity firm Silver Lake, bought the 65% stake for $1.9 billion in cash and $1.25 million in short-term notes. eBay acquired Skype for a total of $3.1 billion in 2005 and subsequently wrote off $1.4 billion in 2007. The valuation indicates that the company made a profit on the deal. It also retained a share in future profits through its 35% stake and a seat on the Skype board.

Skype owns software that employs VoIP technology to offer users free voice and video calls, instant text messaging and file sharing. eBay’s former CEO had acquired the company to facilitate communication between buyers and sellers using its shopping portal. But the strategy failed to take off and the business was a constant distraction to management. The company had to part with $530 million in payment to Skype’s technology founders, Niklas Zennström and Janus Friis, and the ensuing legal battle prompted eBay to start developing a new technology to drive business.

The deal is also likely to be beneficial for Skype as it will improve its core technology. Since Silver Lake owns telecom equipment company Avaya, there could be significant synergies in offering. Skype has developed mobile applications for Apple’s (AAPL - Analyst Report) iphone and Research In Motion’s (RIMM - Analyst Report) Blackberry. It also agreed to embed its services on certain Nokia (NOK - Analyst Report) handsets.

The key question today is whether eBay will offload PayPal that is currently hindered by the scope of the company’s sales. PayPal is a play in the growing ecommerce market and broadening its scope would be a key to future growth. eBay’s own user base could also be more satisfied, since it would not need to force the system on them.

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