Skype Sale Negative for eBay-Heavy ETFs?

The sale of Skype that was rumored last week appears to be close to reality, as San Jone-based company eBay (EBAY) is poised to sell the company to a group of investors headed by private equity firm Silver Lake Partners. Under the terms of the deal, eBay will receive about $1.9 billion in cash and a note for another $125 million for a 65% interest in the company. The deal values Skype at about $2.75 billion. eBay’s total purchase price for the unit topped $3 billion in September 2005, and the company eventually wrote off most of the acquisition on its books after encountering difficulties integrating Skype.

Despite the fact that the purchase price is at the high end of analyst expectations, the reaction to the deal hasn’t been completely positive. Om Malik believes that the deal is a letdown for eBay shareholders who could have realized greater returns if the company had waited for a more opportune time to take Skype public. Citing a series of debacles in the management of the once promising tech startup, Malik laments that “it was as if someone opened the fuel tank on a rocket heading to the moon.”

Other investors were more pleased with the deal. Larry Dignan notes that managing to nearly breakeven on a deal “that was a bad idea from the beginning” is an acceptable outcome. Moreover, eBay is keeping a sizeable interest in Skype that will allow it to profit if the new management team is better able to monetize the technology.

There are a number of exchange-traded funds that have significant holdings in eBay, and investors in these funds are no doubt interested in what the Skype deal will mean for the company’s future. A quick look at ETFs with heavy allocations to EBAY:

• Merrill Lynch Internet HOLDRS (HHH): The HOLDRS line of ETFs from Merrill Lynch tend to maintain relatively high allocations in individual securities, and HHH is no exception. EBay is the second largest individual holding at 23%, behind only Amazon.com (32%).

• First Trust Dow Jones Internet Index Fund (FDN): FDN is designed to track the Dow Jones Internet Index, which is comprised of companies that generate at least 50% of their revenue from the internet. This ETF holds more than 40 individual equities, making it much more diversified than HHH. EBay accounts for about 6.5% of FDN’s holdings, its second largest allocation behind Google (9.8%).

• PowerShares NASDAQ Internet Portfolio (PNQI): This ETF holds companies engaged in internet-related businesses and traded on the Nasdaq Exchange. EBay (9.2%) is the largest holding of PNQI, which has gained more than 50% in 2009.

Disclosure: No positions at time of writing.

Comments

[redbaron:]

By focusing on the Skype deal, investors are ignoring what is happening with eBay's core business. Current announced strategy is to focus on this core business and the announced strategy of getting back to basics. IMHO, this core business is evaporating and the thumb in the dike is not holding back the flood.

Sep 02 07:57 AM

[Leftfield:]

redbaron, now Ebay is focusing on it's core business? They have been standard-issue paint-by-the-numbers MBA approach to cutting corners and paying themselves while the core business languishes. Small sellers of unique items who could profit selling to strapped buyers in this economy have been burned in favor of a me-too attempt to capture large purveyors of Chinese dreck and somehow compete with Amazon.
Any convincing change to this picture would involve a complete about-face by Donohoe and his gang.

Sep 02 11:33 AM

[exodusfromebay:]

Another Asinine move by eBay!

Flipping Brilliant! A spin off would have been a much better deal for the share-holders.

Apparently, Donahoe cares as little for the investors as he does the sellers on the core site.

When are they going to get rid of that arrogant jerk?

Sep 02 01:35 PM