eBay's Scary Movie

Mixing and matching genres is sometimes creatively brilliant in movies. Take Quentin Tarantino's Pulp Fiction, for example. Mix raw violence with well-timed comedy and not a few instances of bizarre behavior, and you've got something that's equally wonderful and terrifying. But that's the exception, of course. More often, you'll end up with The Horror of Party Beach, in which rubber-suited monsters interrupt paradise to terrorize inept, bathing suit-clad teenagers. Yuck.

Weird mergers also sometimes appear on the stock market's big screen. For example, this morning brings news from The Wall Street Journal that auction king eBay (Nasdaq: EBAY  ) is in talks to buy Skype, the privately held firm stirring a Rule Breaking revolution by enabling free phone calls using your computer. Neither company commented for the Journal story, which leaves this Fool wondering: Would this odd combination be more like Pulp Fiction or The Horror of Party Beach? Let's examine both possibilities, Dueling Fools style.

First up is the bear case, and it's easy to make. Auctions and ... phone service? That's like spinach and ice cream. Robin Williams and Vice President Cheney. Red wine and fish. They just don't go together, do they? No, they don't. In fact, it's a good bet that 99% of its customers have never picked up a phone in doing business with eBay. Furthermore, Skype's no bargain at an estimated selling price of $3 billion. (Indeed, that would be twice what the auction king spent for its PayPal business unit in 2002.) And finally, the work required to learn Skype's business could put off earning meaningful value from the merger for years.

Not surprisingly, the bull case requires you to put on your rule-breaking shades. Per the Journal, you'll see there is some synergy here, and it can all be summed up with one phrase: network effect. It pegs eBay's user base at 157 million; Skype has 52 million users globally. That means eBay could sell Skype into more than 100 million households, and maybe a lot more than that. Seriously, think about it: Some eBay users are just nuts with their buying habits, but many are simply cheapskates. Others are technophiles who spend oodles of time on their computers. Skype could prove appealing to both types of eBay customers, albeit for different reasons.

So, what side wins in this debate? I'll suspend my disbelief for the moment and say the bull, for Rule Breaking deals have never been, and never will be, obvious. Let's just hope this one -- if it happens -- doesn't turn into another of the stock market's scary movies.

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Fool contributor Tim Beyers doesn't usually duel with himself, but he's been known to talk to himself. Wait. Isn't that the same thing? No, it isn't. Yes, it is! No! Yes! Sigh. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


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