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Buyout Firms Gear Up for Swipe at PayPal

That deal proved doubly wise for eBay: the company profited off its initial exit, but retained a 30% stake, which substantially appreciated by the time it was sold most recently to Microsoft Corp. in an $8.5 billion deal.

In 2005, eBay spent $1.3 billion in cash and another $1.2 billion in stock to buy Skype, then an independent public company. By 2009, when it became apparent that the voice-over-Internet-protocol company was a poor fit for the e-commerce company, eBay sold Skype at a $2.75 billion valuation, to a consortium of Skype's founders, the Canada Pension Plan Investment Board, private equity firm Silver Lake Partners and venture capital firm Andreessen Horowitz.

But eBay retained a 30% equity stake in the company as part of the deal. It would only take about 18 months for the new owners to sell to Microsoft after increasing the company's valuation to $8.5 billion.

An executive who worked at Skype when the company was absorbed into eBay said what held back its valuation was a litany of integration projects that the buyer foisted onto it - and that, free from these constraints, the company was more successful as an independent entity. However, the source said, existing within the infrastructure of a developed company likely helped both Skype and PayPal to mature as corporate entities.

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Whereas, in 2005, the Skype deal was done to bring a new communication product onto the eBay platform, buying PayPal represented a well-thought-out plan to add payment functionality to eBay's auction block. Now, with both the marketplace business profitable, and the payment processor reaching maturity, if not, simultaneously, peak valuation - the former Skype exec suggested it could be the right time to sell PayPal.

Silver Lake -- the lead PE player in the buyout -- plunked down nearly $1 billion, and tripled its invested capital virtually overnight on the Skype transaction, according to a source. No wonder big-name buyout shops would salivate if PayPal puts a For Sale sign in its digital window.

Tethering itself to a mature asset that could easily be resold in a period of time -- similar to the Skype situation -- should appeal to eBay. Right now, at what one analyst pegged at a $38 billion valuation, eBay can only be a winner on PayPal, having spent just over $2 billion for its primary assets -- $1.2 billion for PayPal, and another $945 million on BillMeLater in 2008.

One source notes that holding onto a stake and putting the company in the hands of operations experts might be its best return on investment generator. And, as another points out, the abundance of discount debt comes at a time when non-traditional players are stepping up to support transactions, be it Microsoft backing Michael Dell's LBO, or Warren Buffett playing lender for H.J. Heinz's buyout.

"It's definitely not the most likely scenario," the source noted, when pressed to offer odds of a PE-PayPal transaction, "but it wouldn't be unheard of, either."

Representatives from eBay declined to comment, except to reiterate its response to Icahn in which the company said that it had explored a spin off or separation of PayPal and had concluded it didn't believe it would suit its current strategic direction.

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