Digital Media

eBay announced Tuesday plans to spin off its Internet phone and video-conferencing service, Skype, with an IPO in the first half of next year.

The decision comes four years after online auction giant eBay , with the plans to offer customers the ability to discuss their transactions in real-time. But over the course of the four years, eBay found its acquisition failed to provide the synergies it sought.

John Donahoe, eBay's chief executive, said in a statement:

Skype is a great stand-alone business with strong fundamentals and accelerating momentum. But it's clear that Skype has limited synergies with eBay and PayPal. We believe operating Skype as a stand-alone publicly traded company is the best path for maximizing its potential. This will give Skype the focus and resources required to continue its growth and effectively compete in online voice and video communications.

Although eBay plans to launch a Skype IPO in the first half of next year, the company noted its exact timing will be based on market conditions.

Last year, Skype generated $551 million in revenues, up 44 percent over the previous year. The number of Skype's registered users has increased to 405 million at the end of last year, up 47 percent from the previous year.

Over the past year, eBay has been weighing its options regarding Skype's fate. When the company announced Donahoe as its new CEO last spring, eBay indicated the online auction giant would take a year to evaluate the future of its online phone and video-conferencing service.

Meanwhile, reports surfaced earlier this month that Skype's founders were interested in repurchasing the company, with the aid of private equity firms KKR, Warburg Pincus, Elevation Partners, and Providence.

eBay shares rose 3.76 percent in after-hours trading on Tuesday to $14.92 a share. During the regular session, eBay closed down 1.71 percent to end the day at $14.38 a share.

Skype's founders are reportedly encountering turbulence in striking a deal with eBay to buy back the Internet phone service, despite the financial backing from a group of large private equity firms, according to The Wall Street Journal.

KKR, Warburg Pincus, Elevation Partners, and Providence are reportedly teaming up with founders Niklas Zennstrom and Janus Friis, who reportedly are interested in repurchasing their company from eBay.

But eBay and the founders' group face a wide gap on price, the Journal reported, and a deal involving the private equity firms appears unlikely.

The private equity firms are reportedly interested in kicking in $1 billion toward the total purchase price, according to the report, which noted it remained unclear on the total bid price.

Back in 2005, for $2.6 billion, asserting that it would allow customers to discuss their transactions in real-time.

eBay has since publicly stated there are few synergies between the companies and that it would be willing to sell off Skype for the right price.

eBay on Wednesday announced plans to revise its struggling marketplace unit, giving it greater focus on its core used goods auction business, rather than its retail business, the company said during its analyst day presentation.

The news apparently pleased Wall Street, which bid up eBay shares 4.7 percent Wednesday, as the company held its analyst day. eBay shares continued to rise Thursday, climbing 2.24 percent to $11.89 a share in morning trading.

With its announcement, eBay addresses one of Wall Street's long-held complaints that the e-commerce giant suffers from an identity crisis. Analysts have previously said that the company has struggled with a desire to stay true to its roots in offering used goods and collectibles through an auction process, yet has also wanted to compete in the fixed-price retail arena with the likes of Amazon.com and other online retailers.

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In a research note Thursday, Ben Schachter of UBS Securities said:

Management acknowledged that its Marketplaces division had fallen behind in its technological aptitude and its ability to satisfy customers. The company emphasized its plan for the division to refocus on the secondary market and develop an improved user experience for the customer.

Schachter, meanwhile, remains skeptical of eBay's forecast that it can grow its marketplace division at the same pace as the e-commerce market next year and outpace the market in 2011.

The UBS analyst added:

The company is attempting to improve its user experience by expanding efforts to include more liquidation/out-of-season products and by overhauling its search function to bring more relevant searches to the forefront.

Imran Khan, a J.P. Morgan analyst, agrees that eBay's marketplace division is a wait-and-see story.

Khan noted in his analyst report Thursday that he believes the division will continue to underperform in the e-commerce market, due to several issues:

(1) low pricing strategy by Amazon, Wal-Mart and other e-commerce sites; (2) continued expansion of selection by niche e-commerce sites and (3) the continued entrance of brick-and-mortar retailers into the e-commerce space.

Cowen & Co. analyst Jim Friedland noted in his research note that competition from not only Amazon but also Google Search is a "serious threat" to eBay's marketplace business.

Amazon and Google allow sellers to post their goods to their respective sites at a cheaper cost, noted Friedland. Sellers, for example, can upload their goods to Google's product search database for free.

He further noted:

We believe the superior buying experience on Amazon and search experience on Google reduces the value of the eBay platform for buyers and sellers. Even though eBay is dedicating significant resources to enhancing search, improving the user interface and other buyer/seller features, we believe it will be difficult for the company to catch up to Amazon.

eBay also told analysts Wednesday that it plans to double the size of its PayPal business over the next three years to approximately $100 billion to $120 billion in annual payments.

Facing a tight economic climate and strong dollar overseas, eBay reported on Wednesday a 7 percent revenue drop in the fourth quarter and weaker net profits.

Shares of eBay, in after-hours trading, fell 6.25 percent to $12.45. The stock rose nearly 6 percent to close at $13.28 a share during regular trading.

The online auction giant reported revenue of $2.07 billion, down 7 percent from a year ago. That figure fell short of analysts' expectations of $2.12 billion in revenue.

eBay's net income, meanwhile, fell nearly 31 percent to $367 million in the fourth quarter, or 29 cents a share, compared with net income of $531 million, or 39 cents a share, a year earlier. Excluding charges, the company posted non-GAAP net profits of $524 million, or 41 cents a share, beating Wall Street's expectations of 39 cents a share profit, according to Thomson Reuters.

eBay CEO John Donahoe said in a statement:

While the holiday season was tough and competitive, our overall results for 2008 were strong.

For 2008, we delivered double-digit revenue and earnings growth; made significant changes in our eBay business; and built a stronger, more diverse portfolio of leading e-commerce businesses. We will build on our strengths in 2009 while managing our business prudently in the continued challenging environment.

Investors pushed eBay's stock down for a third consecutive day Thursday, after the e-commerce giant reported third-quarter earnings and reduced its fourth-quarter forecast amid a meltdown in the economy.

Shares of eBay fell as low as $13.69 in intraday trading, down 12 percent from Wednesday's close. But by the market's close, eBay's shares were down a mere 2.35 percent to end the day at $14.97, as the broader markets closed out with gains.

Earlier in the day, eBay's shares were whacked as Wall Street weighed in, with a number of analysts reducing their earnings estimates and price targets.

UBS Securities dropped its 2008 earnings estimates for eBay to $1.70 a share from $1.73 a share. It also reduced its 2009 estimates to $1.61 a share from $1.73 a share and reduced its six-month price target to $17 a share from $18.

In a research report by analyst Ben Schachter, UBS noted the following:

The company reported seeing weakness in the business from mid-August on, particularly in the retail and auto verticals, and also pointed to slowing overall e-commerce trends...We expect a broader economic slowdown will serve to exacerbate eBay's primary company-specific problem area (and the main obstacle to getting the stock moving again, in our view): slowing growth in its core Marketplaces business.

Schachter noted that although eBay is making moves to stabilize and increase transactions on its site, through such plans as increasing marketing and offering coupons in the fourth quarter to sellers, Wall Street expects competition to be fierce this quarter as e-commerce players duke it out over what is expected to be sparse pool of potential customers.

Schachter further added:

We continue to view eBay as in the midst of an identity crisis, in some respects. The company wants to stay true to its heritage as the destination for buying interesting/used/value goods and collectibles through auction listings; however, it also clearly wants to compete in fixed-price listings (an area where we don't believe the company has a natural advantage) to spur growth in its core. It's exceedingly unclear if the company can do both.

Goldman Sachs, meanwhile, cut its eBay earnings estimates for the fourth quarter, as well as for the fiscal years 2009 and 2010.

Goldman reduced its fourth-quarter eBay estimates by 16 percent, to 41 cents a share, cut 2009 estimates by 13 percent, to $1.64 a share, and cut 2010 estimates by 16 percent, to $1.74 a share.

We do not expect eBay's stock to perform until investors have more confidence that the earnings it is reporting are compatible with renewed GMV (gross merchandise volume) growth; 4Q 2008 earnings weakness appears to flow from macro issues and slowing GMV, rather than from eBay transitioning its business model, which may still lie ahead.

JPMorgan Chase analyst Imran Khan, meanwhile, downgraded eBay to "hold" from "buy," as well as cut its earnings estimates for the e-commerce company for a second time this week. Khan now estimates that eBay's GAAP earnings next year will be up only 3 percent, verses his previous forecast of 15 percent.

Khan said eBay's woes lie in its technology platform:

We believe eBay's biggest challenge is an inferior technology platform, which is making it difficult for the company to compete with other e-commerce platforms, such as Amazon's. In our view, the company has yet to deliver meaningful improvements in search functionality or user experience, which we believe is evident in the inverse relationship between the listing growth rate and conversion rate. We think that if eBay fails to improve the user experience, it will inhibit future growth, even when the economy recovers.

But Brian Pitz, a Bank of America Securities analyst, believes that eBay's platform is "not broken."

Instead, Pitz noted in his research report that eBay is suffering from the same aliment as other e-commerce players, which is a lack of consumer demand in this current economic climate.

Like other analysts, Pitz reduced eBay's 2009 expectations and price target. He forecast eBay to see a 2 percent reduction in revenues in 2009 and to see its earnings per share fall by 7 percent.

Pitz reduced eBay's 12-month price target to $25 a share from $29 a share.

Meanwhile, analysts at Sanford C. Bernstein were seeing green:

We think that the sell-off was an overreaction. Management's reduction of 4Q:08 guidance was in anticipation of continuing consumer weakness, dollar appreciation, and the earnings dilution caused by the BML acquisition (expected to close in 4Q:08).

Sanford noted that it is maintaining its "outperform" rating.