THE handful of investors who acquired a majority stake in internet communications provider Skype Global during the depths of the financial crisis stand to be handsomely rewarded by its $US8.5 billion ($7.98bn) sale to Microsoft.
And some investors did better than others. The biggest winner is private equity firm Silver Lake Partners, the largest current shareholder of Skype with about 39 per cent of the Luxembourg-based company. The second largest shareholder is eBay, which held on to a 30 per cent stake in the company after selling most of it in 2009 to the current investor group.
Other winners include the Canada Pension Plan Investment Board, which owns about 12 per cent; venture capital firm Andreessen Horowitz, the smallest shareholder at 3 per cent; and Joltid, an investment company partly owned by Skype founders Niklas Zennström and Janus Friis, which owns 14 per cent. Messrs. Zennström and Friis each own 18.75 per cent of Joltid directly, according to filings with the Securities and Exchange Commission.
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Silver Lake managing director Egon Durban said its nearly $US1bn Skype investment was the largest equity investment in the Menlo Park, California, firm's history. With the sale, Mr Durban said Silver Lake would receive more than three times its original investment, turning a profit of at least $US2bn. "We had the courage and conviction to invest when no one was investing capital," said Mr Durban.
EBay, which initially lost money on its Skype acquisition, will end up with a sizeable profit. In 2005, the company paid about $US2.6bn for Skype and subsequently laid out another $US530 million in earn-out payments. It later took a $US1.4bn writedown of the investment in 2007. Two years later, the online marketplace sold a 70 per cent stake in the company for $US1.9bn to the investor group. After the Microsoft purchase, eBay's 30 per cent stake will be worth approximately $US2.55bn. It will also receive an additional $US125m for a loan it gave to Skype's investors.
An eBay spokesperson said the deal "gives our shareholders a strong return of approximately $US1.4bn on our original investment for a dynamic business that simply wasn't core to our focus on global payments and commerce."
The Canada Pension Plan invested $US300m for a 15 per cent stake in Skype, which was later diluted to around 12 per cent. A spokeswoman for the plan says it expects to receive approximately $US930m for its stake. In addition, the plan invested $US50m in Skype indirectly through funds managed by Silver Lake. That stake should return about $US155m, before management and investment fees.
Andreessen Horowitz invested about $US50m, and more than tripled its money, said a person familiar with the matter. "People have underestimated Skype and they haven't appreciated the value of it," said Marc Andreessen, cofounder of the venture capital firm.
The story of Skype is a dramatic tale filled with twists and turns. Skype was founded in 2003 by Mr Zennström and Mr Friis who sought to create a company that let people make phone calls over the internet instead of traditional copper lines. The free service took off as many consumers and businesses began to use it to get around expensive international calling rates. Calls to other users of Skype are free, while calls to traditional landline phones and mobile phones are charged a small fee.
Former eBay chief executive Meg Whitman acquired its stake in the belief that Skype would help accelerate online sales if the buyers and sellers on the online-auction site used the service to communicate. But the synergies never materialised, even though Skype continued to grow its subscribers and revenue. EBay also continued to license Skype's peer-to-peer technology from Joltid. In 2007, eBay took a $US1.4bn charge for Skype because of the unit's shrinking value.
That disappointing performance led eBay's new CEO John Donahoe to pursue a new direction. In 2009, eBay said it planned to unload Skype in an initial public offering. Later that year in September, the company reversed course and sold a 70 per cent stake in the Internet-phone business to investors, including Silver Lake, Andreessen Horowitz and the Canadian pension group.
The majority stake sale of Skype, which took place in middle of the global financial crisis, valued Skype at $US2.75bn, about the same price as eBay paid four years earlier. To complete the deal, Skype raised $US825 m in debt to help finance the transaction. It was the first leveraged buyout since the demise of Lehman Brothers in the fall of 2008, according to private equity researcher Prequin. The deal allowed eBay to focus on its core business, retain 30 per cent of the company and receive $US1.9bn in cash for the sale.
Soon after the sale, Joltid sued eBay, the investor group and Skype in the US for copyright infringement of its technology, reaffirming a previous and similar lawsuit in Britain. In November, eBay announced it and the investor group reached a settlement with Joltid that gave Skype ownership of all software previously licensed from Joltid.
As part of the settlement, Mr Zennström and Mr Friis joined the investor group, contributing Joltid software and additional capital in exchange for a 14 per cent stake in Skype, taking shares from existing investors. Skype also said that it took a $US344m charge resulting from the settlement. That cleared the way for an IPO.
Last August, Skype registered to hold an initial public offering. Then in October, the company took the unusual step of naming a new CEO during the IPO process, appointing Cisco Systems executive Tony Bates as chief executive. The change led the company this year to delay its IPO plans to the second half of 2011.
Six weeks ago Microsoft executives made an unsolicited call to Mr Bates and Silver Lake's Mr Durban, said people familiar with the matter. The companies began discussions and the final price was agreed upon on April 18.
Microsoft was the only serious bidder although Skype didn't close the door to other potential buyers, they said. A deals team from Microsoft conducted due diligence, but the process was made easier because much of Skype's financial information was already available via the IPO registration statement, filed last August. The prospect of an IPO helped Skype drive a harder bargain for Microsoft, one person said.
"Microsoft put forth a very compelling offer," said Mr Durban.
