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Monday, September 12, 2005

eBay Wants Skype

eBay has agreed to buy fast-growing Internet start-up Skype for up to $4.1 billion in cash and shares, in a move to tap new sources of growth and add free Web telephone calls to its online auctions.

eBay said on Monday it planned to pay $1.3 billion in cash and $1.3 billion in stock for the online communications company. It will make a further payout of up to $1.5 billion if certain financial targets are met.

The deal will cut eBay's earnings by about a cent per share until the end of 2006 before beginning to boost eBay's profitability, Chief Financial Officer Rajiv Dutta said.

Its shares fell 1.81 percent to $37.93 in early trading on the Nasdaq exchange, after falling 4 percent last week when investors became concerned that eBay might pay too much, giving eBay a market capitalization of about $52 billion.

eBay is renowned for its Internet marketplace linking more than 150 million buyers and sellers, who currently exchange about 5 million emails per day. It hopes that offering free Skype calls within eBay will smooth the way for more deals to go through, and let the company charge merchants for calls that lead to sales.

Skype already leads the booming voice-over-Internet (VoIP) market, which is seen as a threat to traditional phone companies and is being aggressively targeted by online powerhouses such as AOL Yahoo, Google and Microsoft.

Chief Executive Meg Whitman said that Skype had a considerable head start.

"We think Skype has an enormous lead -- 150,000 new users a day, and technology that is generations ahead of where the new entrants are," she said. "And when people are using your brandname as a verb, that is incredibly powerful."

Skype expects revenues of $60 million this year and more than $200 million in 2006, but has yet to turn a profit. In two years, Skype has attracted 54 million members to its free and low-cost Internet-based voice service and is on track to roughly double in size within a year.

Luxembourg-based Skype offers a free service when users make computer-to-computer calls to other Skype users. Charges apply when Skype users make calls to, or receives calls from, regular phone numbers.

eBay said its merchants would be able to use Skype software to allow buyers with last-minute sales questions to "click to talk" to a customer service agent.

"Once we integrate communications into e-commerce, we think that Skype is going to remove considerable friction" from the buying and selling process, Dutta told Reuters by telephone.

Skype would be the biggest acquisition yet for 10-year-old eBay and analysts said the price tag looked hefty without more details about the strategic rationale.

Nearly half Skype's users live in Europe, a quarter are in Asia and an eighth are in North America, providing eBay with a large audience as it seeks to expand outside of its core North American market.

As of October 2004, Skype had raised $24 million from several private equity firms including Mangrove Capital Partners, Draper Fisher Jurvetson, Bessemer Venture Partners and Index Ventures.

The deal provides a major payout for Skype founders Niklas Zennstrom and Janus Friis, who also created the controversial peer-to-peer file-trading network Kazaa.

Zennstrom and Friis, who have touted Skype as a "killer" application that could threaten entrenched players in the telecom sector, will keep their positions at the company.

Earlier this month, a local unit of a Chinese telecom company moved to block some Skype services amid reports that a broader crackdown on VoIP services was in the works.

"This is largely a rumor, and I think it's not nearly the size of the issue that was first reported," Whitman said.

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