In September 2005 online auction house eBay paid over $3bn for Skype, which had been founded in 2003 by Niklas Zennstrom and Janus Friis. In stark contrast to when it had bought PayPal (the internet-based payment company), industry commentators were quick to question the logic behind the deal, pointing out that there was little obvious fit between eBay and the internet phone company. CEO Meg Whitman defended the deal vigorously, stating in a BusinessWeek article on the 12th titled “Why eBay Is Buying Skype” that “Together, we can pursue some very significant growth opportunities. We can create an unparalleled e-commerce engine.” But, within a year of the acquisition Ebay had written down the value of Skype to $1.2bn, suggesting that it too began to think that the company was not a strategic fit and it had overpaid. Perhaps the purchase of Skype was a case of what Warren Buffet calls “Institutional Imperative” – the “need” for managers to act and do like their peers no matter how irrational it may seem (in this case drive growth through technology company acquisition). However, with eBay having sunk so much emotional energy and resource into Skype surely they’d sit on the investment indefinitely?
机 jī opportunity
Under eBay’s ownership, Skype continued to grow – the number of registered Skype users rose from 53 million to 405 million. Even though this progress had been made, on September 1st 2009 eBay sold 65% of Skype to a group of private investors in a deal that valued the firm at only $2.75bn – stating that ‘limited synergies exist’. eBay was smart to realize that the companies might do better apart, to ignore sunk costs in the process and to retain 35% of a business that remains full of opportunity.
- Taking a breather before any strategic decision to remind yourself to ignore sunk costs (easy to say, tough to do)?
- Asking if your M&A will make your company better (rather than just delivering growth)?