eBay's Killer App?

I hate scary movies. Fellow Fool Tim Beyers saw one last week when he penned a piece on the rumor that Motley Fool Stock Advisor recommendation eBay (Nasdaq: EBAY  ) was relentlessly pursuing privately held Skype, the popular provider of voice-over-Internet-protocol (VoIP) software and services. Now it's time to review that scary movie: The press release that makes the buyout deal official has been released.

eBay will pay $2.6 billion in up-front cash and eBay stock to acquire Skype. The $1.3 billion in cash is half of what eBay had in the bank, so it won't bleed any red onto its debt-free balance sheet. Ah, but there is a "performance-based consideration" (in other words, a bonus) in this deal worth up to $1.5 billion in cash and/or stock. The total price tag could be a whopping $4.1 billion by 2009 -- payable at eBay's discretion.

For its billions, eBay is getting a young company with approximately $7 million in 2004 sales. That sounds bad until you realize that eBay expects its prodigy's sales to increase to $200 million in 2006 -- valuing the up-front deal at 13 times forward sales. No word on how much of that sales forecast is expected to be the result of "synergies" between the eBay and Skype brands.

At first blush, I agreed with Tim Beyers' logic that auctions and phone service go together as well as spinach and ice cream. It's a scary combination, especially when so many high-priced mergers never reach anything near their touted potential.

But I have to say that I've warmed to this deal. Although I find the price out of this world, eBay is acknowledging its core market, Internet transactions, and attempting to provide a platform for communications between its customers and everyone else on the Internet.

This isn't just about eBay and its PayPal subsidiary. It is about a well-known Internet site rolling phone service into its Internet sales and payment package to create a "killer application," set for deployment on some of the Web's prime real estate. This combination could create fundamental changes in the way e-commerce is done. Sure, as a software consultant, I've heard this promise about VoIP technology for years, but I've never seen it delivered. In my opinion, the delivery is finally on its way.

Investors will ask if Skype is really worth $2.6 billion. Since it's rumored that News Corp. (NYSE: NWS  ) was willing to pay $3 billion for Skype, paying less was probably not an option.

Will eBay make a bundle on this massive investment? The odds aren't exactly in its favor, especially since its competition has begun to plunge into the VoIP world as well. Microsoft recently purchased Teleo, a VoIP company whose services are already integrated into Microsoft Outlook and Internet Explorer. It doesn't share eBay's focus on e-commerce, but it's another choice addition to Microsoft's software portfolio (at an asking price that's been kept under wraps).

Meanwhile, Google (Nasdaq: GOOG  ) has its limited VoIP offering Google Talk in beta testing, Time Warner's (NYSE: TWX  ) AOL unit has its own efforts, and so doesYahoo! (Nasdaq: YHOO  ) . That's quite a crowd, and all of the players are known for their well-padded bank accounts.

Until now, nobody's found a surefire formula for making VoIP a regular part of the Internet experience. Will eBay and Skype provide the necessary synergy to give this scary movie a happy ending? It looks like we'll have to wait for the sequel to find out.

Further Foolishness is calling:

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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Clickhereto see the Motley Fool's disclosure policy.


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