July 2, 2009
June 26 (Bloomberg) — EBay Inc.’s dispute with the founders of its Skype Internet-phone division threatens to delay a Skype initial public offering and lower the amount raised.
Skype, which lets users place calls online, told a London court in April that it may have to suspend the service if it can’t resolve the fight. Skype’s founders, who still own a piece of software used by Skype, have accused EBay of breaching a licensing deal. They’re threatening to yank the technology from Skype, disabling the world’s largest provider of international calls.
EBay sued the founders in London to prevent that from happening. Still, the timing of the case may interfere with plans to spin off Skype as an IPO in 2010. If unresolved, the lawsuit also may cut the price EBay gets in the offering, said Randolf Katz, a lawyer at Baker Hostetler in Costa Mesa, California. He isn’t involved in the case.
“The market hates uncertainty because you can’t price around it,” said Katz, who has advised technology companies on corporate finance and IPOs. “The lawsuit is out there, and it will be factored into the price.”
Chief Executive Officer John Donahoe devised the IPO plan to unlock more value from Skype. He has pegged the business’ value at least $2 billion, saying he’s already rejected at least one offer for Skype.
John Pluhowski, a spokesman for San Jose, California-based EBay, declined to comment. Joltid Ltd., the company operated by Skype’s founders, also declined to comment.
EBay, the most-visited U.S. e-commerce site, rose 21 cents, or 1.2 percent, to $17.35 today in Nasdaq Stock Market trading. The shares have climbed 24 percent this year.
‘Devastating’ Risk
Skype had asked a judge to accelerate the trial. It lost that bid, meaning the case is likely to go to court in the first three months of 2010, Justice Kim Lewison said, according to court transcripts of the April 3 hearing. EBay wants the IPO to happen in the first half of next year.
If Joltid wins, the effect would be “devastating,” Charles Hollander, Skype’s attorney, told the court. Skype would “exit the market whilst we embark on a lengthy and costly process of developing an alternative form of software code.”
Skype lets people make calls from their computers to land lines and mobile phones, as well as other computers. It was founded in 2002 by Niklas Zennstrom and Janus Friis, who also created the file-sharing software Kazaa.
EBay paid $2.6 billion for Skype in 2005 and then wrote down the value to $1.2 billion the following year. EBay never made good on its original promise for Skype: integrating the service into its e-commerce site, so buyers and sellers could use it to discuss large purchases.
Sales Growth
Skype’s revenue grew 21 percent in the first quarter to $153.2 million, contrasting with a sales decline for the rest of EBay. It now accounts for more than 7 percent of the company’s revenue. With 443 million users, Skype handles about 8 percent of all cross-border voice traffic, making it the top provider of international calls, according to research firm TeleGeography in Washington.
“If EBay can’t reach an agreement over that piece of technology, that could certainly turn the Skype acquisition into a much larger debacle,” said Jayanth Angl, an analyst at Info- Tech Research Group in London, Ontario. “That could ultimately affect their ability to operate Skype and reach their IPO objective.”
Painful Switch
Even if Skype were to find a new technology to replace Joltid’s, it would still need to persuade customers to return to the service after a shutdown, Hollander told the court.
“One can see the effect of that on the business,” he said.
Hollander didn’t return a call seeking comment. Tony Singla, another attorney involved in the case, referred calls to Miriam Schmelzer, an attorney for Skype, who didn’t immediately respond to requests for comment.
The founders retained rights to the peer-to-peer sharing technology behind Skype when they sold the company to EBay four years ago. Zennstrom continued to run Skype until 2007.
Skype makes money when customers use the service to call regular phones. Customers also pay to set up voice mail and use call-forwarding and text-messaging services.
Justice Lewison rejected Skype’s request for a trial by October, saying that its dispute with Joltid wasn’t affecting the development of Skype’s business or its ability to make strategic transactions. While the court hearing was public, some documents in the case have been marked private.
The legal wrangling makes it more likely that Skype will go to a private buyer rather than hold an IPO, said EBay investor Ryan Jacob, head of Jacob Internet Fund in Los Angeles. That would probably mean less money for investors and EBay, he said.
“A private investor might be more willing to deal with and settle a lawsuit,” Jacob said. “Would it diminish the value of the asset slightly? I think it would. There’s no question about that.”
To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net
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Tags: EBay Inc, info-tech research group, IPO, Skype
