eBay Reaches for Skype

It will pay $2.6 billion in cash and stock, although the potential price could be higher.
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eBay (EBAY) - Get Report said Monday it will acquire Internet phone company Skype for cash and stock worth $2.6 billion. The agreement has earn-out provisions that could take the price as high as $4.1 billion over time, the companies said.

"By combining the two leading e-commerce franchises, eBay and PayPal, with the leader in Internet voice communications, we will create an extraordinarily powerful environment for business on the Net," said eBay CEO Meg Whitman in a statement.

On Thursday, reports that the online auction giant was in talks over

a multibillion-dollar deal for Skype sent eBay's shares down 3% as Wall Street gave a thumbs-down on the possible pairing.

(For a bullish read on the Skype acquisition,

click here.)

"If eBay was considering whether to make this move, it would be a not-so-subtle admission that growth is slowing," Hoefer & Arnett analyst Marty Pyykkonen said Thusday. He has a reduce rating on eBay.

After a decade of rapid growth, eBay has stagnated. Now, with a $2 billion pile of cash and short-term investments, the San Jose Net auctioneer seems to be looking for some new direction.

While both eBay and Skype are Internet businesses, there are few other similarities, say analysts. eBay pioneered and now dominates a virtual marketplace connecting buyers and sellers. Skype created communications software and a system of connecting PC users with a free calling service.

Skype promises to do with voice-over-Internet protocol, or VoIP, what creators Niklas Zennstrom and Janus Friis did for music with file-sharing service

KaZaA

. Zennstrom and Friis will remain in their current positions following the acquisition.

Analysts said before the deal was confirmed that they were encouraged to hear that eBay may be addressing its sluggish sales, but some were alarmed to hear the company was considering an entirely new business path.

"When I heard about it, I was wishing it was a rumor, for the sake of eBay," says ABI Research analyst Vamsi Sistla. "Skype is too far of a stretch. If they really want to grow, there is more lower-hanging fruit out there."

In explaining its logic, eBay pointed to communications synergies.

"Skype will streamline and improve communications between buyers and sellers as it is integrated into the eBay marketplace," the company said. "Buyers will gain an easy way to talk to sellers quickly and get the information they need to buy, and sellers can more easily build relationships with customers and close sales."

Skype will "increase the velocity of trade on eBay," the company said, especially in categories like used cars, business and industrial equipment, and high-end collectibles.

Skype's success quickly captured the tech industry's imagination. And suddenly it looked like VoIP was poised to upend the old-line telcos. But speculated deals with Internet titans like

Yahoo!

(YHOO)

and

Google

(GOOG) - Get Report

haven't materialized, as both outfits opted to buy smaller players or develop their own VoIP services.

"VoIP is hot, I'll agree, and cheap to build, but the revenue is tiny," said Sistla.

Offering eBay users a calling service could foster better communications between buyers and sellers, but there doesn't seem to be anything that could be considered more compelling to a Skype strategy, say analysts.

"I would find it hard to believe anything they'd say about synergistic advantages," says Pyykkonen.

ABI's Sistla summed up the eBay/Skype idea in a metaphor.

"I can understand a cheetah trying to be a tiger, but this is much different," says Sistla. "It's more like a cheetah trying to be an elephant."