eBay is selling most of Skype to Silver Lake and other investors despite a pending licensing lawsuit with Joltid, Skype's co-founders' peer-to-peer company. eBay CEO John Donahoe expressed his confidence in the sale in a television interview with CNBC Sept. 1, but gave no indications that investors are protected in case Joltid wins the case and Skype is enjoined from using the P2P technology. Even so, it has become increasingly common for larger vendors to pay their way out of lawsuits.
Now that eBay has agreed to sell 65 percent of VOIP specialist Skype
Silver Lake and other investors for $1.9 billion in cash and a $125 million loan
from eBay, there remains the question of what sort of risk the investors are
Skype licenses its core technology from Joltid, a peer-to-peer company owned
by Skype co-founders Niklas Zennstr??Ã©m and Janus Friis. Earlier in 2009 Skype and Joltid became locked in a licensing dispute
now wending its way through the UK
court system. The issue has forced Skype to develop a replacement technology
should it lose the right to retain the license.
eBay has said the substitute software would be expensive
fail. Worse, Skype could lose the case and be forced to shut down. Some 481
million users place free calls
from their computers through Skype, which
posted sales of $551 million in 2008. eBay expects Skype's sales to top $1
billion by 2011.
The suit, then, comes as Skype is at its strongest, yet most vulnerable. A
decision enjoining the leading VOIP (voice over IP) provider from serving
millions of users would be disastrous to its business, particularly as it is
trying to become independent. Enderle Group analyst Rob Enderle told eWEEK the
move "raises a large red flag and makes the litigation a very important
part of [Skype's] ability to execute their strategy."
Why, then, would investors Silver Lake, Index Ventures, Andreessen Horowitz
and the Canada Pension Plan Investment Board take the chance of investing
Skype? Clearly, eBay and the buying parties aren't too worried about the Joltid
case, which is set to go to trial in June 2010.
CEO John Donahoe expressed his
confidence in the sale in this television interview with CNBC Sept. 1.
Donahoe noted that after eBay learned of the
suit, the company disclosed it. He added that eBay plans to file an IP for
Skype with confidence in Skype's legal position.
Moreover, "The fact that a group of top-notch, high-caliber, independent
third parties have now bought Skype, paying $2.75 billion valuation, I think is
evidence of their independent confidence in the future of the business and
their confidence in the future of this particular legal claim," Donahoe
said. "We're not going to let that get in the way of the business. We're
confident about Skype's future. That will play its way out as it does. Our
focus is going to be on building Skype's technology, building its business into
its extraordinary potential."
Enderle said the investors not only must feel confident that eBay would
prevail, but likely put in clauses to protect their investment if eBay does
not. Investors, for example, could have required
that eBay return part of the buy-out money
they are paying for their 65 percent stake in Skype.
An eBay spokesperson told eWEEK she was not aware of any special provisions
to protect the investors should the litigation not end in Skype's favor, and
added: "We're confident in the progress we're making in the replacement
technology, but also in our position in the case."
While Donahoe said the litigation will "play its way out," he
could easily have said eBay will "pay its way out" of the suit without
causing people to blink.
It has become increasingly common for larger vendors to pay their way out of
lawsuits. Sometimes vendors do this because they want to resolve the legal mess
quickly and go merrily on their way. Sometimes it's because they don't feel
they can win. Whatever the case, if eBay and the investors are concerned, it's
Yankee Group analyst Carl Howe told eWEEK that while pending lawsuits can be
sand in the gears of acquisitions, it's rare to find a company with no pending
"I have to believe the buyers discounted the value of the
lawsuit," Howe said. "For a lot of these lawsuits, you can make them
go away if you just pay enough money. Some of these lawsuits are the cost of
doing business in the technology business."
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