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| Eliminating distraction |
| Robert Cyran / Sep 03, 2009, 00:52 IST |
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Skype: Ebay’s purchase of Skype was an overpriced strategic mistake from the start. Selling 65 per cent of the internet telecom firm at a better-than-expected $2.75 billion valuation eliminates this vexing distraction. Moreover, it permits the online auction firm to focus on more important matters – such as what to do with its cash-rich balance sheet and its Paypal division.
The company originally hoped that Skype would make it easier for buyers and sellers to swap information telephonically, which would benefit its auction business. It also hoped Skype customers would use Ebay’s payments service, Paypal. Instead, it left management dealing with an unrelated business. The company wrote down its $3.1 billion investment by nearly half.
Selling a majority of the business to Silver Lake Partners and other investors is not just less distracting and quicker than an IPO of the unit, it actually fetched a good price. It values Skype at a heady four times estimated 2010 sales. Moreover, by retaining a 35 per cent stake, Ebay has a bit of schmuck insurance in case Skype’s growth, and value, rockets.
Now chief executive John Donahoe should turn his attention to two other matters. Ebay already had more than $3 billion of net cash on its books. This adds another $1.9 billion. Most of this pile is overseas, making it problematic to return cash to shareholders without generating a big tax hit. To soften concerns over the company blowing this on an acquisition spree, it should more clearly outline its acquisitions’ policy.
Furthermore, Donahoe should continue his clean-up by seriously considering a Paypal spin-off. The payment services business may suffer from being within Ebay because other firms, such as Amazon and Google may be reluctant to use a rival’s service. Splitting it could increase Paypal's already fast growth. This is important.
Even without a separation, Ebay projects Paypal sales at $5 billion in 2011 with margins approaching 20 per cent. On Visa’s multiple of 12 times operating profit – which is conservative given Paypal’s faster growth – Paypal would be worth $12 billion. That would leave Ebay’s core marketplace trading at just 5 times projected operating profits for 2011. Donahoe has ably rid Ebay of an inherited problem. Now he faces two pleasant challenges.
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