So everyone finally agrees on what many have been saying for the past two years: eBay ( EBAY) paid too much for Skype. eBay's capitulation on that point -- underscored by a write-off equal to more than half what the deal cost in September 2005 -- has ended that debate. But some key questions remain. A few of them are best addressed in the case studies that will be rolling out for months to come: how to ensure that the disruptive new business you're buying can be monetized; the dangers of overpaying for a flavor-of-the-month start-up; integrating a company with a different culture into yours without spurring an exodus; the myth of "synergistic" acquisitions, etc. Such academic pursuits will keep business school students weighed down with reading for years to come. But for the purposes of the stock market, there are four more immediate questions facing eBay -- and the Internet sector in general: Can eBay's stock rise even further now that the Skype cloud is starting to clear? The write-off is a bitter pill for eBay to swallow, but at least it will go down fast. The company is taking a $1.43 billion charge related to the Skype purchase, but those charges are like Wall Street's version of a confession booth. Once you come clean, your sins are absolved and you can get on with your life. The idea that eBay had overpaid for Skype was one that seemed to color every single earnings call since the acquisition was announced, a dark tint that spilled over to its marketplace and PayPal business.
Starting this month, when eBay is slated to report its third-quarter results, the Skype unit -- which accounted for less than 5% of all eBay's revenue in the second quarter -- will be less of a distraction. So investors may start to notice that key metrics in the marketplace business are rising. In fact, that's one of the ironies of the Skype hand-wringing: eBay shares have climbed about 20% since late August, and now sit near a 52-week high. With Skype moved further to the background, even more attention may focus on the company's marketplace strength. eBay's filing with the Securities and Exchange Commission on the $530 million in so-called earnouts -- paid to Skype's founders and investors to give up the $1.7 billion bonus pledge without a fight -- hints that more payouts could be lurking. eBay says it will pay them another $200 million if it sells a controlling stake in Skype before March 31, 2008. This may be a coded way of saying eBay is leaving open the option of putting Skype on the block after next March. That would further cheer investors who have been griping about the Skype deal all along. Once Skype ceases to be overvalued, can it still help eBay? The answer here is a small yes. One example of how it could work is Skype Prime, which lets experts cheaply set up video chats to offer professional advice and tutoring, even around the world.
The bigger question for eBay investors is whether these new ideas will turn into real revenue streams. There probably is some potential for Internet telephony to mate with e-commerce, as eBay has long maintained, but it's likely to take several more years to become a big contributor to eBay's bottom line. Wouldn't eBay be better off just selling Skype? If Skype becomes a drag on overall profit or margins, eBay will probably think hard about it. But Skype has been profitable for the last two quarters. Then there's the question of who would buy Skype. A cable company? A telco? Google ( GOOG)? That's harder to say. Given the integration that's happened so far, it's unlikely eBay would want to sell it off entirely, but would keep a substantial minority stake. That could make a sale even tougher. Will the revaluation of the Skype affect how other blockbuster deals are priced? Sadly, it's not very likely. Just look at Nokia's ( NOK) $8.1 billion price tag for navigational software maker Navteq ( NVT). The deal is worth 14 times the revenue that Navteq brought in last year and 74 times the net income. Granted, that's not much of a premium over where the market had been valuing Navteq, but it's also a reward for investors who helped bring Navteq to that high price. Nor is eBay's Skype write-off likely to dent the high valuations that have been extrapolated from Microsoft's ( MSFT) rumored purchase of a 5% stake in Facebook. The presumed valuation has less to do with fundamentals than with the demand fueled by hype. As long as hype is pricing deals, we won't see the cold reality behind eBay's repricing of Skype having much of an effect elsewhere.