M&A Alert - September 1, 2009
Silver Lake Partners Agrees to Acquire Skype
Transaction Overview
On September 1, 2009, a group of investors led by a private equity firm, Silver Lake Partners have agreed to purchase 65% of ownership in Skype for $1.9b. Ebay will continue to hold the remaining 35% stake.
Target Description
Based in Luxemburg, Skype was founded in 2003 and offers peer-to-peer online video and voice call services. It enables users to make, receive and forward video and voice calls to and from landline, mobile phones and voicemail. Skype-to-skype calls are available at no charge. Non skype-to-skype calls are available for a cost that is determined by a special charge plan. Skype was founded by Niklas Zennstrom and Janus Friis, who are also founders of the file sharing application Kazaa and the peer-to-peer television application Joost. Skype licenses its peer-to-peer communications technology, a crucial core element for Skype’s services, from Joltid (founded in 2001 by a team of Kazaa’s founders), with whom it is now in a legal dispute. Skype was acquired by Ebay in 2005 for $4.1b, of which $1B was and is yet to be paid in earn-out. Prior to Ebay’s acquisition, Skype had received $18.8mm in funding from Draper Fisher Jurvetson (Tim Draper) and Index Ventures.
Buyer Description
The investor group is led by Silver Lake Partners (Managing Director: Egon Durban) and includes Index Ventures (a previous Skype investor), Andreessen Horowitz (General Partners: Marc Andreessen and Ben Horowitz, in its first major investment as a new fund launched in July 2009) and the Canada Pension Plan Investment Board.
The transaction values Skype at $2.75b. Ebay had reportedly been looking to sell the business for approximately $2b or more. Ebay had previously rebuffed a purchase offer from Skype’s founders who raised funds from KKR, Warburg Pincus, Providence Equity Partners and Elevation Partners. In 2008, Skype generated $551mm revenue, a 44% increase from 2007, and had 405mm registered users, a 47% increase from 2007.
| Cash consideration paid | $19b |
| Seller note | $125mm |
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| Purchase Price Multiples: | |
| 2008 Revenue1 | 3.5x |
| 2008 EBITDA2 | 16.3x |
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Note: 1) 2008 revenue was $551mm, sourced from CapitalIQ 2) 2008 EBITDA was $116mm, sourced from CapitalIQ
Strategic Rationale
The original strategic rationale underlying Ebay’s purchase of Skype back in 2005 was that VoIP would become an important tool for Ebay buyers and sellers to converse and facilitate transactions of goods and services. This vision was never realized and with Ebay’s core auction business growth stalling, Ebay made the rational decision to divest Skype and free up cash and management to focus on reinvigorating the core business.
Architect Partners’ Observations
Skype is the premium VoIP brand and VoIP will play an increasingly important role in voice communications with time. Independence will undoubtedly be healthy for Skype. One key area of uncertainty in this situation is the ownership of the underlying IP with Joltid claiming infringement against Skype for improperly using or modifying Joltid’s software source code. We suspect Skype either intends to develop a technology platform work around or enter into a renegotiated licensing deal to put this issue behind them. We’ll be watching this development closely.