eBay Wins With Skype Deal: Opinion - TheStreet

NEW YORK (TheStreet) -- When former eBay (EBAY) - Get Report CEO Meg Whitman bought Skype in 2005 for $2.6 billion ($3.1 billion with all the earn-outs added back), most assumed it was the deal that would sink her career.

It seemed like a laughable idea then: that buyers and sellers on eBay's marketplace were going to click on a Skype icon and talk to each other to finalize the details of their transactions.

It was a laughable idea. It was completely strategically flawed at the time. It never should have been done in the first place, and Whitman's successor sought to undo the deal as quickly as he could.

On top of that, Whitman took a lot of heat for overpaying for Skype. Critics said that spending so much money on a private company showed a callous disregard for eBay shareholders.

I believe, in fact, that the size of the Skype deal scared other buyers from anything close to that price range -- until Groupon came along.

The only big Internet deal after Skype (and before the rumored interest in Groupon by

Google

(GOOG) - Get Report

) was

YouTube

for $1.5 billion. Remember when that amount seemed staggering?

When current eBay CEO John Donahoe sold off 65% of Skype in 2009 to outside investors including Andreesen Horowitz and the Canada Pension Plan Investment Board, eBay shareholders and the business media in general seemed relieved.

That deal was struck for $1.9 billion. It was still far below the purchase price from 2005, but eBay seemed to get more pats on the back for at least getting back close to even.

Now, not even two years later,

Microsoft

(MSFT) - Get Report

is paying $8.5 billion for all of Skype.

It's difficult to criticize Donahoe for making the 2009 deal to sell off most of the company. Back in 2009, few would have predicted that in only two years Silicon Valley would be seeing huge multiples of the YouTube takeout price paid for private companies. In fact, people would have thought you were crazy.

Donahoe deserves credit for keeping a minority stake of 33% in Skype. That was smart.

There are many so-called "long-term shareholders" who, at the time, wanted eBay to dump the entire Skype asset. These shareholders would have said sell it all at a loss -- just to be rid of it.

They complained that Skype was "noncore" to eBay (and they were right).

But Donahoe couldn't undo the fact that Whitman -- his friend -- had done the deal. The money had been paid. The asset was owned by eBay, even with all the lawsuits flying around from the founders suggesting that they owned the IP. (It was funny how, as soon as the deal was struck with Andreesen Horowitz, you never heard about that IP issue again.)

Donahoe had to make the most money he could from the asset he owned back in 2009. He decided -- wisely -- that sometimes the shareholder is wrong and doesn't know best.

Sometimes, it takes managers -- who live and breathe the business every day -- to make the right call for what they believe will create the most value for the shareholders (which includes themselves) in the long run.

In this case, retaining that one-third stake in Skype means that eBay shareholders made about $2 billion on their "wildly expensive" $3.1 billion purchase of Skype back in 2005.Imagine going back and suggesting such a notion to the business press or shareholders in 2009 or 2005. You would have been laughed out of the room.

Donahoe didn't have a crystal ball. Things could have gone differently. But Donahoe knew -- just as presumably Microsoft does now -- that Skype was and is a very valuable company, with loyal users, and fast growth behind it. He knew that, if its growth continued, eBay could still do well in the long run from its 2005 deal. He was right.

Somewhere, Meg Whitman is breathing a sigh of relief -- and is about to rewrite a chapter in her eBay biography.

At the time of publication, Jackson held no positions in the companies mentioned

.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.