Selling The Company Back To The Founders
I read with interest the Brad Stone piece in the NY Times this morning suggesting that Niklas and Janus might buy Skype back from eBay. I think this is a wonderful idea and I hope it happens.
Back when eBay bought Skype in 2005, I was skeptical that eBay was the right home for Skype. I also thought the price was in the right ballpark. I got the first part right but the second part wrong. In hindsight, eBay paid too much and bought a non-strategic asset.
Now eBay is rumored to be thinking of unloading Skype for $1.7bn to $2bn and the Skype founders are trying to round up as much as $1bn of cash (including their cash I assume) to combine with seller financing from eBay to get the deal done.
Brad says in the Times that Skype did $145mm in revenues in the fourth quarter. If that's true, and I assume it is, then Skype could do as much as $700mm to $800mm in revenues in 2009 if it is growing at a reasonable rate. Is $1.7bn to $2bn a reasonable price for a business that is doing $800mm in revenues in the current year? I don't know, it really depends on how profitable that business is.
I do know that Skpe is a great freemium business model. Most of the conversations on Skype are free because they are between Skype users. But some of them are paid and according to TeleGeography, Skype now makes up 8% of all international calling minutes. If Skype can be a $800mm revenue business this year and capture more than 10% of the international calling market, I think $1.7bn to $2bn may well be a very good price.
But the best thing about this is getting the asset back into the hands of the entrepreneurs who created it and built it. We all saw what happened at Apple when Jobs took back the reins of the company and I suspect Niklas and Janus would not be thinking about this if they didn't have a strong strategic plan for Skype.
I've said this many times on this blog and I'll say it again. Big companies mostly mess up entrepreneurial companies when they buy them and it really is best that companies like Skype stay independant and run by their founders if that is possible. And it looks like that might be possible with Skype. That makes me happy.
The buyback is a whole ‘nother thing, isn’t it? It happens somewhat more frequently in mid-sized, family owned businesses that sell out to larger, publicly held corps. Here in New England, there was a spate of buybacks of mid market companies in manufacturing, industrial verticals, service companies, etc. They seemed to fall within the gross revenue pre acquisition range of 90-400M /year. They were bought by the likes of UT, Textron, what have you. Some of the sons and daughters took the wild chance of buying the business back when the inept management of the conglomerates alienated the top talent at these firms; talent that was carefully nurtured over years, and these selfsame businesses groomed for retention.Not all of the buybacks were successful, a few were – I wish I had the names handy, but these were all local or regional stories. One was a large-ish industrial process control service and parts company bought by Johnson Controls, ruined, and bought back for a song by the sons who then rehabilitated the business. The founder, their dad, though aging, was still alive and was an old client of mine in a different, smaller business.
I was thinking of that model as well when I wrote the title
i was part of a family group that bought back a family manufacturing business (in New England) back in the very early 1990s. we succeeded… but not in any way connected to the business plan we brought to the table at the time. only by a series of events we could never have predicted did we succeed in turning around the company and then selling it again some years laterin general, i think founders or family members should almost never buy back businesses, and for one simple reason — such buyers are almost always strongly or even primarily motivated by emotion, and that is a recipe for disaster.
Yep, the batting average is around 50%, but some buybacks of the family shop also result in zombie companies that kind of never thrive, never die. Sometimes the children who apprenticed with dad and the uncles worked in some capacity, but never had the industrial and account relationships, and that goes for the former corporate buyers, too.I was involved in one buyback, in the support role as a consultant who knew most of the systems for the real time rapid replenishment supply chain system. The corp buyer messed things up by pushing SAP down the businesses throat.http://bizcast.typepad.com/…http://bizcast.typepad.com/…When the boys came back, they borrowed big, they couldn’t operate the new ERP (no hard feelings, neither could the previous buyer), and they needed a rollback to the previous systems fast. Not so easy as one would think.It took years to get reestablished, and I am sure that if they had a do over, they would nix that buyback, and as you say, seperate emotion (and fealty) from logic.
I suspect that Skype has the potential to grow at an even faster rate in the coming year as people continue to look for ways to save money. Want to save on a phone line? Get Skype out for your mobile.
Why don’t they just build a new Peer-to-Peer VoIP service?
The network effect on skype is pretty powerful now
I’m not so sure. Heavy users are usually part of groups which are pretty easy to move to the latest/greatest.
It would be fascinating for Skype to end up back with its founders and if it happens, I’ll be rooting for them to succeed (again)but your price scenarios are pretty wild, i thinkeven if skype is doing ~$500MM revenues last year (as their Q4’08 suggests) then they have to be growing like a weed to achieve “$700mm to $800mm in revenues in 2009” as you write — that would 40-60% Y/Y growth!!!if they were growing like that its arguable eBay wouldn’t sell the asset, they’d spin it out as a separate public companyany case, more likely they are growing maybe 10%-20% Y/Y… so they will do maybe $550-$600MM in 2009.now lets say they do have fat margins (though its easy enough to imagine they don’t.) say, 25% EBITDA.thats $150MM EBITDA in 2009now let’s say current economic conditions don’t matter and they deserve the fattest possible multiplesay, 8X EBITDA? 10X?so that’s a forward-looking valuation of $1.0-1.5BNbake in the current economic shitstorm, plus buyers perception that ebay is motivated seller, i’d say the price is $1BN at mostjust a guess………
I wonder if skype’s numbers are broken out in ebay’s quarterly reportsI’ll add that to my weekend “to do” list
eBay does break out Skype. Check out eBay’s last 10k http://bit.ly/y06xc as of 12/31/2008405.3 million registered skype users @ $2B valuation would imply a $5 value per user.Also, ebay’s communication segment (which is mainly skypeOut minutes) did $525mm revenue in 2008 (2007 revenue was $364mm). So $800mm in 2009 would imply 50% revenue growth YoY.I wonder how much revenue growth will come from the iPhone app though. Living in the US, I never use skypeOut but will definitely use it on wifi over my iPhone when abroad.
Thanks so much ScottSo skype’s revenue grew almost 50% pcnt in 2008 (over 2007)50% growth in 2009 is probably aggressive but I think $700mm is pretty easy to doAny idea of margins in this business?
No problemLooks like some analyst folks peg skype’s segment contribution margin at 20%, so roughly $105mm in contribution for 2008source w/ some good forecasts/data: http://voiceontheweb.biz/20…
I wonder if it could be more profitable outside of eBay
It’s funny how acquirers always tout the efficiencies of consolidating administrative and other “general” functions. When the reality is the opposite!
eBay itself only reports skype’s Y/Y growth rate as 26%http://bit.ly/1xEvgZ
Good press release find. The 26% YoY growth is for Q4 08 vs. Q4 07. Iguess their growth lagged a bit in Q4 compared with the rest of the year.
Steven’s way off. Skype *did* $551 million in 2008. CAGR from 06-08 *was* 68%. Through 2011, Ebay is projecting 30% CAGR and 18-20% direct contribution margin. But by most accords, Skype numbers may actually accelerate.
Ebay Investor Relations. Try it some time!http://investor.ebay.com/
The smiley face is cute and all but your post failed both the common sense check as well as the fact check. Maybe you should be more careful in the future?
Lighten up, dude. In his original post Fred was speculating. I did same.Sorry if that offended your delicate sensibilities.Btw, I checked your checking: My speculation was not far off.Quote, eBay’s Q4’08 earning press release, at http://bit.ly/1xEvgZ“Skype contributed $145 million in revenue for the quarter, representing 26%year-over-year growth”In my original comment, I guessed Skype is growing 20% Y/Y:)
Skype is a very well run company. Both before the purchase by EBay and after it. To have a management team that can succeed under such varying conditions bodes well for their success if they assume control again. The common widsom is that the management team is the key to success in any venture.Assuming Ebay retains a significant equity share in Skype, they could very well come out way ahead on this deal. Win win situations like this have a lot of latitude in their terms. The progression of this deal going forward will probably occur with an air of negotiating the best interests of all parties instead of a hard ball negotiation. Very encouraging.
Why would ebay buy them in the first place? I could see ebay buying mint, or something somewhat aligned with their core business. But never really understood the skype move..I could see it making sense for google (because their vision clearly centers on controlling the world’s information lol).
I think Skype could be a strategic acquisition for a few different players. For example, I could see a wireless provider buying them to further monetize some their data network traffic.I’m very eager to see how Skype’s recent launch of iPhone software and upcoming Blackberry software will affect wireless providers and wireless business models over time (particularly in urban areas at first).Some ideas:<insert wireless=”” provider=””> + SkypeGoogle + Grand Central + SkypeDevice Maker (Apple, RIMM) + SkypeThoughts on these scenarios?
I don’t see goog buying skype as they would have already if they wanted itI don’t see appl buying skype because it would threaten their carrier partnersIn fact, eBay has been interested in selling skype for some timeI think any strategic buyers who really wanted skype would have bought it by now
With al due respect to existing contracts between ATT and Apple; Isn’t the “Apple a threat to it’s carrier partners” a horse that’s already out of the barn. ;-)Apple has already trumped the carriers by grabbing the throne of the future of profitability in that industry. (Applications on handhelds.) Those wireless carriers now are truly nothing but “pipe”/”a series of wireless tubes”.Now that the “Over wifi” exception exists for Skype on iPhone how long is it before “Skype Over LTE/UMTS” becomes a reality and wireless guys look roughly as relevant as the wireline RBOC’s?Having said that it’s likely Jobs doesn’t view Apple as a “voice carrier company”.On Google and Skype. True they may have made a decision not to go after Skype back 3 years ago or even a year ago, but with their more recent enhanced interest in voice with GrandCentral perhaps the context has changed.I guess it all depends on what “Schmidt, Page, Brin” think about Google’s strategic future with Voice for Businesses. The GrandCentral/”Google Voice” move seems to indicate a move in the direction of Business Voice. IF Gogole offered my small business a soup to nuts SMB toolbox of “Email, web hosting, Advertising, Desktop business Apps and Full Featured, High Def Business voice” at a price only they can offer due to their scale and biz model….that would be hard to resist. one stop shopping for all my SMB communication, internet and advertising needs form a company certain to be in business a long long time. Talk about an attractive bundle.Also, why not then also offer that solution to large businesses? Buy a Nortel or Avaya on top of the SMB offer, milk the services revenue from one of those traditional enterprise voice vendors and slowly migrate even the large businesses to a hosted services model with the promise of…Google will be your ‘variable cost IT department’.Seems pretty obvious play for Google to me.Cheers,Roger
I don’t use Skype as much as I used to, primarily because over the years many of more of my friends have migrated to the Apple/Mac platform and iChat still provides better audio and video quality. I still have one friend that I communicate regularly with via Skype — he’s in South Africa, travels frequently in that part of the world. Skype service/quality can be spotty in that region, but so can landline and or cellular service. Cellular service in Africa is where the the action is however, that’s why my buddy has been in SA working on the cellular infrastructure for the last few years.The other primary reason I’ve moved away from Skype is that I have unlimited international calling via Sprint for $4.00/mo USD. This service/price has been available for at least 3-4 years in the US. So I don’t see the business motivation for “<insert wireless=”” provider=””> + Skype” or “Device Maker (Apple, RIMM) + Skype “, but maybe I’m missing something.
I think Google would rather have a SIP-based VoIP service. Skype is another walled garden.
Walls are always ready to have a controlled gate(API) cut in them. Google is one big walled garden with controlled gates for google-controlled entrance. the “open” SIP standard is a complexity nightmare.
I’m pretty sure there’s enough uptake that you can make free all-VoIP calls amongst Gizmo, asterisk, and lots of campus VoIP systems, right?
Make speical note of that JoltID issue at the end of the article. I did business with Janus and Niklas years ago with kazaa around the creation of altnet. That same skype engine (built by the estonians) used to run joost. I’m pretty sure Ebay actually let the IP slip thru their fingers when they did the deal. I wouldn’t be surprised at all if N&J are on some solid legal footing.
More from Om on IP rights issue:http://gigaom.com/2009/04/1…
Is there any hope for big companies acquiring startups? Why do they screw them up so badly? Is it public investor pressure? Lousy management?
YesWhen the acquisition makes sense, it’s a good thingCisco in particular is great at itI would argue that google has done well with youtube and keyhole, but not so well with feedburner and many others
Maybe the founders are trying to buy it back so they can enable their own hardware device creating a true video phone available to everyone at a low cost. This would allow them to compete with services like Vonage by offering more bells and whistles (video conferencing + networking effect). I see Google Voice going in the same direction. Hardware device powered by Android with Google Voice, Maps, Search, etc, as an IP phone service with 3rd party devices made by companies like HTC, Samsung, and more.
This scenario, albeit on a smaller scale, played itself out recently in the Montreal tech scene. Airborne Entertainment- producer of content, games and apps for mobile devices – was acquired by Japanese mobile company Cybird in 2005 for about $90M CDN. While I believe the plan was to obtain a foothold in the North American mobile market, the reality was likely culture-clash and stifling of the creativity of the AIrborne team.In the summer of 2008, the founders – Andy Nulman (former CEO of Montreal’s Just for Laughs Festival and friend of my wife) and Garner Bornstein (a local serial entrepreneur), who stuck with Airborne all along, bought the company back from Cybird and are doing things their way again. In addition to content deals with Fox for Family Guy (and other shows), Maxim, NHL, they’ve recently branched out into mobile real estate apps and I’m sure there’s more to come…
I love to hear stories like this
Agree – will be interesting to see if it happens and the precise nature of the “strategic plan”. Btw, would be interested to get your (and the readers) thoughts on why big companies often mess up their acquisitions… What are the main factors in your pov?
Loss of key management (ie janus and niklas)And forcing the company to participate in an overly bureaucratic and innovation stifling culture
Fred – you say that “big companies mostly mess up entrepreneurial companies when they buy them.”Given that the IPO market is effectively shut (even if an IPO were more feasible, with SarbOx few entrepreneurs want to take a company public any more), what does a statement like that mean for exits? Founders could build lasting companies, and then hand the helm to someone else, all while the company remains private, but how would the VC market deal with that, when they need to pay back their LPs within a decade or so.
It means we need a secondary market to emerge for privately held securities
It’s easy to make “going back to the entrepreneurs” sound good when you cherry pick Apple. How about another Jerry Yang?
Jerry really never ran Yahoo! Until he was “brought back”
I viewed the eBay purchase as a safe haven for Skype. Skype had been associated with wishing for the death of traditional telecom… the link eludes me but I’m pretty sure I’ve read early coverage where the founders of Skype stated as much. That’s got to make for an interesting funding landscape if you are a small company.Skype could have been a voice, messaging, and -vetting- tapestry to connect sellers, buyers, etc. within the eBay community but this never seemed to take hold. I imagined entire call centers based on Skype. I imagined that they would get past laptop and desktop software bundles and push directly into handsets for the home that were multi-use phones. Too expensive. Too late. Oh well.More than anything, voice transmission over IP networks i.e. VoIP is a race to zero. Prices continue to drop. A call should be worth -zero-.Charging for voice is just not going to be something that survives as a high margin service forever. Perhaps Pulver’s push for open high definition voice codecs (HD voice) might stroke a new era of possibilities for charge voice transmission. Perhaps. Oh wait, that requires cooperation with large risk averse companies known as big telecom. Skype has amazing voice quality though… Hmm… Next…So, Skype in native format of skype-skype calls is the very race to zero realized. Now it is on a variety of platforms that can fit in your pocket. If only it was just a bit easier. If only “digital voice” products from cable providers hadn’t happened. If only the all you can eat LD plan had not been crafted as a retainer bundle by mobile and traditional wireline big telcos.I had hoped to wake up one day I see eBay listed along with AT&T, Verizon, and others… but I don’t think they can think that big or swallow the lobbying cost of entry. I’d guess that eBay won’t fund the war Skype wants to wage.So, selling Skype to make it a nimble (squashable?) company again would be interesting to play out as a scenario. If they licensed the technology to press into form factors that people leave in a charging cradle, they could be the final nail in long distance billing.The Skype challenge is to get there before people start to question the absurd pricing of mobile telephone plans. Again, if eBay had gotten into selling “calling” packages, this might all be a different discussion, but they have not.I am firm believer that service provider margins on services like those enjoyed by mobile operators will only last as long as they can erect barriers through legislation and policy hurdles. I still have Skype pegged as the only disruptive force out there in the race to zero.Wireline business is being shed and renamed while the core IP groups are retained (Sprint sheds Embarq and Verizon legacy ILEC assets vs. MCI/UUnet for example) tells me that the voice part is still valued but the IP is more highly valued. Skype has to connect parties through those IP networks.Skype still needs a brilliant inclusion (or infusion) where it can inflect maximal disruption to the traditional telecom model of selling voice services at ARPU with margins that prop up massive levels of overhead. eBay is not that place and is not likely to be the angel or devil funding vehicle for it.I think Comcast should put on a pair of nice shoes and ask Skype out for a date and offer to buy dinner. It would really make telcos more jealous than they already are now.
Good comments Jay.HD Voice is a good opportunity to sustain margin on a voice product…as are the margins we all still pay for mobile voice. Now imagine mobile HD voice over LTE networks delivered to smart/premium mobile handsets. I’d pay for that.The key, as Jeff Pulver clearly understands, is getting to critical mass of having enough people able to generate and receive an HD voice signal from either their home or mobile device.Skype is really the only existing voice ecosystem with enough mass of users to jumpstart that biz model. This is one of those “Cliff Business” situations Seth Godin blogged on eloquently in 2004. But who can afford to “light this candle”.It’s either Google or perhaps, as you suggest, a Comcast. Someone with enough money and subscriber base already to get it all going. If Google or Comcast, I’m a Comcast Triple play customer, emailed me saying…we are sending you FREE, attractive set of new phone basestations and handsets for your home that will be high Def Voice and have lost of cool features; I would open the box and start using them.BTW these phones would have screens where Comcast could deliver value added applications.Now, these phones would be Skype-ready and behind the scenes Comcast would give me a Skype account if I didn’t already have one. Now I’m in the Skype Dial plan AND the PSTN dial plan with no muss, no fuss. Now not only are my Skype to Skype calls HD voice, all my comcast in-network calls or comcast to Skype calls are HD.Now instead of having to market to the masses this idea of a “Skype VoiP, internet Voice” I market it as “Comcast Digital HD voice”. And the premium offer would include a sexy touch screen “Apps UI” phone for the kitchen that would become an app store kiosk for Comcast customers. Apps could be used on the phones OR…on My HD bigscreen that Comcast drives with the HD Cable box. Add speech recognition and we’re getting close to a “Bill Gates house experience” for the common Joe and Jane.This makes HD voice a critical thread in my entire multimedia home experience as part of sustaining an overall profit margin for a comcast for the Multimedia home experience bundle versus trying to profit on voice all by itself.Ebay had no viable vision for how to leverage the Skype ecosystem.
Love this post, too.Does this mean you’ve gotten more favorable on shooting for IPO exits?(typo: “independant” –> “indepedent”)
One has to look at the parallels of Skype (eBay) with the iPhone Ecosystem (Apple) and see missed opportunity, with a downside that looks pretty good. Why couldn’t Skype be a full blown platform like iPhone?Truth be told, that is where I thought eBay was going when the deal was announced back in September, 2005. The thesis then was that eBay looked at Web 2.0 emerging and saw all of these folks jumping on the “syndicate, subscribe and open API” bandwagon.So the argument went, eBay bought Skype because they concluded that ensuring long term relevance was a function of having a proprietary runtime/platform to capture more of a consumer’s daily mindshare than their then-current transactional focus afforded. They bought Skype to be their client software platform play.Historical execution suggests that that wasn’t the case, but if interested, check out the full post:A different spin on eBay-Skype (http://bit.ly/J8aM)Cheers,Mark
From your prospective of the market, do you think we will begin seeing more divestitures?
I don’t knowI sure hope so
loving this blogsitting in jakarta getting an education from commenters on the semantics of a skype re-buy.oh – twitter now works in the UAE fred – progress!
Social media continues to work its magic
There is another interesting aspect to this possible sale.. eBay never bought the p2p technology underpinning Skype – that tech stayed with the founders and was licensed. That license has been revoked..
Fred, isn’t there an internal contradiction in what you are saying, given the “race to zero”? If the purpose is to destroy telecoms and make voice on the Internet more and more free, what will you use to get the service paid? How can Skype survive? You say it can survive on calls outside the system. That depends on a theory of not having the threat of free in-Skype calls not undermine the old dinosaurs completely. But they will be undermined by freeness, and then when there is more and more Skype, everyone will want to get on Skype to make it all free. So…how does it then keep getting paid as it fulfills its own prophecy? What other thing can it sell if it can’t sell minutes of talk?
Good question. I think they can make a fair amount of money on mobile devices
thanks for post
The idea, as expressed in the NY Times article, is to get the seller financing from eBay and everything else would be equity I think2.4x revenues would be a good deal if they were making $150mm in ebitda or more
I think all of those are in play at some level
Paul, Skype’s growing every number over 30% (despite horrendous managment)! It had CAGR from 06-08 of 68%! With a move in to business, growth will likely *accelerate* and that’s on an already very large base.Why the hate?
You apparently still haven’t reviewed the Ebay IR. Skype talk time growth is accelerating. And pretty much everyone agrees that a move into business will be positive.But it’s pretty obvious you care less about facts and, for whatever reason, more about disliking Skype.Just to confirm, you would only pay $1.1B for a company with 2009 revenues of $800m with 20% margins, 30+% CAGR and accelerating usage?