Skype Sales Will Go Ahead Despite Lawsuit Threat

Now that eBay has agreed to sell 65 percent of VOIP specialist Skype to Silver Lake and other investors for $1.9 billion (£1.2bn) in cash and a $125 million loan from eBay, there remains the question of what sort of risk the investors are taking.

Skype licenses its core technology from Joltid, a peer-to-peer company owned by Skype co-founders Niklas Zennström and Janus Friis. Earlier in 2009 Skype and Joltid became locked in a licensing dispute that is 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 and could 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 (£338m) 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 in 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.

eBay CEO John Donahoe expressed his confidence in the sale in this television interview with CNBC on 1 Sept. 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 not showing.

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 lawsuits.

“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.”