| | EBay Drops on Reports It May Buy Skype Phone Service (Update7)
Sept. 8 (Bloomberg) -- Shares of EBay Inc., the largest Internet marketplace, fell after reports the company may buy Web telephone operator Skype Technologies SA for $2 billion to $3 billion.
EBay is in talks to purchase Luxembourg-based Skype, whose software allows Internet users to speak to each other for free, the Wall Street Journal and New York Times reported today, citing people familiar with the negotiations.
The prospect of EBay adding a voice-over-Internet service had investors wondering how the operation might add to profit and what it bodes for company strategy. More than 50 million people have registered to use Skype, which only charges for calls from computers to mobile phones or traditional fixed lines.
``Investors see EBay going outside of its core business here,'' said Michael Koskuba, who helps manage about $50 billion in assets, including 1.8 million EBay shares, from New York for Victory Capital Management. ``What does that mean about its core business?''
Shares of San Jose, California-based EBay had their biggest decline in 11 weeks, dropping $1.53, or 3.8 percent, to $38.93 at 4 p.m. New York time in Nasdaq Stock Market composite trading.
Chief Executive Meg Whitman has been expanding services and buying Web companies to try to sustain the pace of growth at EBay, which on average doubled its profit the past three years. Through yesterday EBay shares had dropped 31 percent from their Dec. 30 high, hurt by smaller gains for sales and profit this year.
Skype has held discussions with other potential purchasers including News Corp., Yahoo Inc. and Microsoft Corp., the Journal said. The talks with EBay are at a sensitive stage and may still collapse, the newspaper said.
`Killer Application'
The latest brainchild of Swede Niklas Zennstrom and Dane Janus Friis, Skype is the product of the same Estonian programmers the two employed to build Kazaa, Napster-like software that shook the entertainment industry by letting people share music and video files.
``Skype is the killer application'' in the voice-over- Internet sector, said Legg Mason Wood Walker Inc. analyst Scott Devitt, who's based in Baltimore and rates EBay shares ``buy.'' ``There's absolutely no reason why EBay can't participate if Yahoo!, Google and Microsoft can.''
The three companies have each added Web phone capabilities.
``Clearly these three companies are becoming increasingly competitive vis-a-vis EBay, and the thought is maybe EBay would want to respond with a defensive move,'' Standard & Poor's analyst Scott Kessler said in an interview.
Vonage Holdings Corp., the largest Internet phone company, has about 1 million subscribers who pay about $25 a month.
Kat James, a spokeswoman for Skype, declined to comment on the talks when contacted by Bloomberg News. Victoria Biggs, a spokeswoman for EBay in London, also declined to comment.
EBay's Buys
EBay last month bought Shopping.com Ltd. for $634 million, its largest acquisition in more than 2 1/2 years, to add another platform where sellers can list merchandise. Since 2003 it has purchased or taken stakes in four Web companies including Craigslist and Marktplaats.nl to add classified ad listings in the U.S., Europe, South Africa, Australia and New Zealand.
Acquiring Skype could cut EBay's 2006 profit by 4 cents to 5 cents a share, according to J.P. Morgan Securities Inc. analyst Imran Khan, who estimated Skype's revenue next year could rise 50 percent to $90 million.
EBay was expected to boost profit to $1.05 a share in 2006, from 84 cents this year, according to the average estimates of analysts surveyed by Thomson Financial.
Phoning Sellers?
The acquisition could be ``strategically positive'' by bolstering EBay's customer service, improving communications between buyers and sellers and possibly increasing the number of users and transactions, Khan wrote. The New York-based analyst rates EBay shares as ``overweight.''
That line of thinking drew some skepticism.
EBay buyers calling sellers using Skype's software ``sounds kind of silly,'' said Norm Conley, who helps manage $950 million, including about 225,000 EBay shares, at St. Louis-based J.A. Glynn & Co. ``Part of the beauty of EBay is you can interact when you want to interact as a buyer and as a seller.''
Skype and Yahoo offer a service that allows users to call each other via software on their computers. Closely held Vonage and other Web phone services send calls over the Internet in much the way e-mail travels.
EBay, which is debt free, entered this quarter with $2.75 billion of cash and short-term investments, up from $2.14 billion a year earlier, the company said in a statement July 20. Short-term investments include Treasury notes and other investments that can be liquidated in three to 12 months with little loss in value.
IPO Is Possible
Skype, founded in 2003, declines to say whether it's profitable. The company's investors include Draper Fisher Jurvetson, Index Ventures, Bessemer Venture Partners and Mangrove Capital Partners.
Vonage, based in Edison, New Jersey, plans to raise as much as $600 million in an initial public offering, the Daily Deal Aug. 25 in its online edition.
Skype is also considering an initial public offering and hired Morgan Stanley to advise, the Wall Street Journal wrote.
The Internet's major brands are now facing up to Internet telephony. Last month, Google Inc., the most-used Web search engine, introduced free software that lets people send instant messages and make phone calls with their computers.
The same month, Microsoft Corp., the world's largest software maker, bought Internet telephone company Teleo Inc.
To contact the reporter on this story:
Chris Burritt in Greensboro, North Carolina at cburritt@bloomberg.net.
Last Updated: September 8, 2005 16:19 EDT
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