A Comprehensive Analysis on eBay Acquisition of Skype Deal
Mergers and Acquisitions are also attractively because they can close effectively and swiftly without much interrupting current operations. But, there have been many cases where Mergers and Acquisitions deals did not work out, and the primary evil behind such failure is that the entities are unable to meet post-closing integrations; hence, not able to achieve and ascertain synergies, supportable growth and value creation, which generally motivates Mergers and Acquisitions. In this article, we are going to know the failure of the eBay Acquisition of Skype deal.
What is the Background of eBay Acquisition of Skype Deal?
eBay was founded in 1998 in California, USA, and it is an e-commerce company with an aim to connects buyers and sellers around the globe via a digital platform. Skype Technologies is a company that enables an individual to make free phone calls and video calls via a VOIP (Voice Over Internet Protocol).
In the year 2005, a digital e-commerce company eBay acquired Skype, A European BOIP provider, for 2.6 Billion US Dollars. This eBay Acquisition of Skype deal becomes one of the crucial points at that time as the price on which Skype was purchased was tremendously high, given that Skype directs to produce 7 Million US Dollars in revenue.
The rationale behind the eBay Acquisition of Skype deal was to encourage the synergies between the companies & to put together the technology of both entities to increase and develop user growth engine assets & eBay alliances.
But, eBay had been flourishing with dealing with PayPal in the past, as PayPal was acquired by eBay in the year 2002 for 1.5 Billion US Dollars which was another most costly investment made by eBay. However, at the end of 2004, eBay succeeded to mix PayPal into their business model. In the year 2005, with the same idea in mind, as to increase its business operations through means of VOIP Communication, eBay approached Skype to fulfil its vision & get Skype in a high price auction.
What is the Primary Aim of the eBay Acquisition of Skype Deal?
Following are the aims of the eBay Acquisition of Skype deal:
- eBay intended to combine Skype into its commerce world with the purpose of boost digital users experience as a fast way of communication;
- eBay saw Skype as a means to raise the numbers of members into eBay’s business framework as Skype has 10 millions active users;
- Skype was bought for eBay’s users as this would aid in creating more client loyalty and would raise the velocity of the trade among its users;
- As Skype appeared as a well-liked means of communication via VOIP, eBay saw this technology as it can attract many new members into their area, and such means can act as a robust way of communication between its members for selling & buying.
What is the Result of this Deal?
EBay’s users declined the technology of Skype as a way of communication & considered as needless for communication between their users. eBay was not able to combine Skype into its business framework. After getting the Skype, eBay doesn’t design a plan to use the Skype, as there was no information with the users on how to utilise the Skype, except for the option to contact via Skype and the Skype users have no information that eBay and Skype were associated.
Moreover, after two years of eBay Acquisition of Skype Deal in 2007, due to the failure of this deal, eBay bring out an option to write down the value of Skype by 1.4 Billion US Dollars. But, Skype continues to act alone as its revenue increase to 170 Million US Dollars with a growth of 25% and added more than 37 million users in their VIOP, reaching 480.5 million registered users.
In the year 2009, eBay gets up intending to divest Skype because of the lack of synergies between Skype & eBay and to concentrate on its core business. A meanwhile the Skype was also facing different challenges & Intellectual Property Litigation. eBay was able to sell most of the stake in Skype to an investor group for transaction value totalling 2.75 Billion US Dollars, and eBay maintains a significant minority stake in Skype.
What are the Reasons Behind the Failure of eBay Acquisition of Skype Deal?
Mergers and Acquisitions are always considered an inorganic plan that creates synergies between the entities intended to accomplish growth that is much more rapid than organic growth. But, it will also invite some significant amount of risk, and it can lead to the failure of such types of deals and destroying the value of shareholders. Similarly, the eBay Acquisition of Skype Deal failed because eBay was not able to combine Skype into their business. eBay has overstated the synergies, and the price of purchase for Skype was enormously high, including its revenue only amounts to 7 million US Dollars.
Following are the main reason behind the failure of eBay Acquisition of Skype Deal:
- Poor Integration;
- Absence of a Strategic Plan;
- Inadequate Due Diligence;
- Misinterpretation of Target Company;
- External Factors;
- Cultural Dissimilarities;
- Overestimating Synergies;
- Deficiency of Management.
Vital Points that are required to be considered after M&A Integration Successfully
Following are some vital points that are required to be considered after M&A Integration successfully:
- Value Construction:
- Cost & revenue goals;
- Recognition of cost & revenue synergies;
- Customer Transition Plan.
- Resolving the power and individual issues rapidly and appointing the Post-Acquisition Integration Team.
- Setting up Communication Strategy.
- Developing a complete integration plan.
- Fulfilling compliance, antitrust issues, and regulatory.
- Sewing the actions in such a manner is in the line-up with the deal’s nature.
- Committing to Cultural Alignment.
The primary objective of the Mergers and Acquisitions deal is to control the synergies created through the combination of two entities. But, sometimes Mergers and Acquisitions’ could break or make a company because of the risk links with such inorganic growth. Hence, if an entity did not integrate both entities, the M&A will fail. eBay had invested in Skype to leverage the technology use of Skype for increasing their commerce business, but eBay was not able to combine both businesses, which outcomes in an enormous write-down of the Skype value.
Hence, it is vital to bring out the integration plan and to make a strategy that can alleviate the risk connected with the Mergers and Acquisitions deals. So, different factors should be considered while going into a deal & growing a productive plan to combine the business.
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