eBay set to spin off Skype, but what is it really worth?

Online auction giant eBay has announced it will spin off its voice-over-internet subsidiary Skype in early 2010 via a sharemarket float, but most analysts doubt eBay will even recoup the amount it paid for Skype back in 2005 in an initial public offering.

Skype was acquired by eBay in September 2005 for nearly $US4 billion. The service, which allows users to make free Skype-to-Skype phone calls over an internet connection, has over 400 million users, and generations $US551 million in annual revenue from other telecommunication connections.

That figure is up 44% from 2007, and eBay has just announced it expects the service to exceed $US1 billion in revenue in 2011. The service now accounts for 8% of all international calls, according to communications industry researcher TeleGeography.

“Skype is a great stand-alone business with strong fundamentals and accelerating momentum,” said eBay president and chief executive John Donahoe in a statement.

He has been evaluating Skype’s value to eBay since he took over his role in April 2008, and also hired a new management team for the VoIP group.

Since then the service has experienced even larger growth, with the company’s iPhone application recording one million downloads in just two days. The application alone has added half a million users to the service, the company says.

“Skype has become a stronger business in the past year, and I expect it will be even stronger a year from now,” Donahoe said. “Skype has accelerating global user growth and strong fundamentals, diversified revenue streams and is competitively positioned in a large market.

“But it’s clear that Skype has limited synergies with eBay and PayPal. We believe operating Skype as a stand-alone publicly traded company is the best path for maximising its potential.”

Donahue says that separating Skype from eBay will allow the company to focus on e-commerce and online payments, “and deliver long-term value to our stockholders”.

But some aren’t so sure that this is right time to be selling Skype.

Ovum research director David Kennedy says that “it’s a pretty tough environment to be seeking funding for services that have good prospects in the future but are still in development”.

There has also been much speculation regarding the value of any public offering, with some analysts expressing doubts that eBay will recoup its initial $US4 billion investment.

Merrill Lynch analyst Justin Post believes the service is worth $US2.2 billion, but says that eBay may still be considering a sale to private investors.

Jeffries & Company analyst Youssef Squali has set the company’s value at just $US1 billion, citing less aggressive profit margin forecasts. Credit Suisse analyst Spencer Wang has estimated a $US1.85 billion valuation. 

The Financial Times has suggested a valuation range from $US1.5 billion to $US2.3 billion “assuming it can maintain the operating margin at 21%, before stock-based compensation and overheads”.

Gartner research director Elroy Jopling has also hinted at a valuation less than the initial purchase, and describes eBay’s deal as “another failure”.

“Skype may be a $US500 million company with a recognisable brand and a wealth of communication experience, but it is still dwarfed by its competition in effectively all the areas of Skype’s strengths.

“Skype has the opportunity of a new start, but even this re-birth has questions as a possible initial public offering in 2010 would be at the worst of times, and suitors seem to be few.”

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