Thursday, September 08, 2005

Is Meg Pulling a Carly?


When Carly Fiorina announced her plan to have Hewlett-Packard—one of the all-time great, if fading, technology franchises—buy commodity PC-maker Compaq Computer for $25 billion shortly before 9/11, she told HP employees in a horribly prescient email that the deal marked “a historic day.”

She was right about that, because in retrospect it marked the beginning of the end for Carly Fiorina as the restorer of HP’s faded luster.

Even worse for Carly is that she was wrong about nearly everything else in her email, including the guts of the problem, as this excerpt makes clear:

Our competitors are going to use every chance they can to discredit it: They'll say we'll lose focus, they'll say we won't be able to execute, they'll say we won't be able to make the tough decisions fast enough.

I believe we will prove them wrong.

[http://news.com.com/2009-1001-272560.html?legacy=cnet]

Four years later, Carly was out.

Now, today, we read that Meg Whitman, the toy company executive who guided eBay up one of the greatest growth paths in world business history (and I mean that sincerely—no sarcasm at all), is making a $2 to 3 billion overture to buy Skype, the Swedish-based internet phone company, from the ex-Kazaa creators who founded it and the VCs who funded it.

According to the online Wall Street Journal story,

…the person familiar with the situation said that eBay is keen on adding services that make it easier for its customers to buy and sell goods online, as it did when it acquired the electronic-payment processing service PayPal in 2002.

Now, to give Whitman her due, PayPal was a homerun deal for eBay. And not just a barely-over-the-glove-of-the-leaping-outfielder type of home run, but a Manny Ramirez, screaming-over-the-light-poll-at-Fenway type of home run.

PayPal not only fit like a glove with eBay’s business of acting as middle-man to online buyers and sellers, but eBay gave PayPal’s payment system instant critical mass that made it an internet standard.

Today PayPal generates one quarter of eBay’s revenues, and Whitman deserves all due credit for the deal.

But Skype?

According to the WSJ story,

EBay's massive and technology-literate user base of 157 million could prove willing adopters for Skype software. And those customers — which are often segmented into niche communities — could use the software to communicate with like-minded enthusiasts. Skype's software has been downloaded 162 million times, and has 52 million users world-wide.

Well, I guess.

But my partner uses Skype and so does my brother-in-law…and while they like it well enough, I run my business on instant-messaging and wireless email. Telephones are used for company conference calls and other, less frequent, human interaction—and I suspect the core eBay user acts the same.

I mean, how many of eBay’s users actually communicate regularly via phone to run the nuts and bolts of their business? How many want to start?

As for the real behind-the-scenes stuff going on here, I don’t know much more than what I’ve read.

I know that Meg tried out for the top job at Disney and backed off after getting mixed signals from the Disney people—probably a very wise move, considering the blood-sucking, Machiavellian DNA of the Walt Disney Company.

So why she wants Skype is beyond me.

I suspect, however, if she gets it by paying $2 to 3 billion for a company with an estimated revenue base (the Skype financials are not public) of $6 to 10 million and no apparent fit to the eBay operating model, then it could mark yet another “historic day” in the annals of technology-related acquisitions.

As Compaq did for Carly.


Jeff Matthews
I Am Not Making This Up


The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

29 comments:

tahoe kid said...

Just my opinion, FWIW (and it's probably not worth very much), but I think people want to communicate with people NOT locations. Therefore I am a huge fan of wireless. That's why I don't get the WiFi craze. Why do you want to be held captive by a location to access the internet when you can get a wireless card for the same laptop and have access anywhere? Granted access speeds may not be comparable at times, but VZ is advertising wireless broadband access at $59.99/month. While it does not have 100% nationwide coverage, it will get closer over time. Sprint and Cingular will be rolling out there wireless broadband the end of 2005/early 2006. Wireless is the future.

SellToWhom said...

I was asking myself that same question this morning, after looking at that and the $600mm News Corp / IGN deal. Murdoch buys for 600mm what could have been bought 3 years ago for 10mm, 2 years ago for 25mm, and could easily be built from scratch for far less.

I cannot understand the logic in buying a VoIP provider such as Skype. VoIP technology has been around for ages. Remember VocalTec?

Competitors are everywhere: Vonage, AT&T, MCI, DeltaThree, Net2Phone, etc. Prices are steadily declining, so I cannot see how this is a long-term revenue play.

So, if it is not revenue they are after, is it the desire is to somehow acquire more "users"? The implications of the return of bubble thinking at Ebay is frightening.

Neil said...

The value in Skype has to either lie in the technology or the user base. Meg is saying that they need the technology; if that is really true then they are paying billions for what could almost certainly be bought elsewhere or aquired through partnerships for 1% of that. And probably develop it internally for even less.

I can't believ that Meg is buying the user base, that makes even less sense.

The value of an asset is linked to the replacement value (Tobins Q) and paying 100 times replacement value for voip technology is desperate and probably says a lot about ebay making a last gasp for bubble valuations (they have a great business don't get me wrong! but their PEG is way out of line).

William said...

If you hear the term "cross-selling," head for the hills.

DaleW said...

So I know Jeff's commentary is provided gratis, etc, which I appreciate, but I was wondering what happened to part II of "They Get Paid for This." I was intrigued by the following:

"But tomorrow we will look at a more egregious type of behavior from Wall Street’s Finest—the kind that results in a well-paid analyst being off by almost 100% on his “free cash flow” analysis of a money-losing company that has experienced a reduction in its cash balance, net of debt, from $170 million to almost zero in the space of nine months."

No rush...just wondering if it's in the works at some point. I like mistaken free cash flow analyses.

trying to be not stupid said...

First off, Ebay is no HP, and Skype is no Compaq. Not in terms of size or scope or even long term effect on the business. Secondly, what at Ebay leads anyone to think management is desperate (except for this move)? Ebay management has consistently performed and did not panick - even in 2001 when it's stock got taken to the woodshed with the rest of the Naz. I agree with Jeff in that I don't see the initial rationale to this purchase, but that doesn't imply there isn't one. Seems to me Ebay is calculating in their approach and I'd tend to give them a wide berth until they prove I shouldn't.

I'll be watching for more context and info on this deal as it moves ahead.

Its_strange said...

"Learn to be still" ...can anyone identify what music star who wrote this ? I'm sure Meg has heard him many times . I guess she never paid attention

Slash said...

What surprised me was that it took HP four years to get rid of Carly. I doubt Meg will pull a Carly. HP was in dire straights when they did Compaq the market they competed in was slipping right below their feets. EBAY has a good grip on auction market even if growth is slowing. EBAY needs to focus on driving more transactions not more users. I am willing to bet that EBAY does not buy Skype.

stealthelephant said...

I don't believe the transaction is stupid on its face but I'll grant it is awful hard to justify from a valuation basis. What is Skype worth to eBay? It's a voodoo discussion. Management obviously believes the transaction makes sense from 1) capturing the Skype network and 2) increasing transaction volume or transaction dollar size through Skype. It's not as dumb as it sounds particularly if the Skype can facilitate more cross border transactions or allow eBay to layer on fees for more complicated types of auctions/transactions. It takes a bit of imagination to understand how this works. And I don't pretend to understand how this acquisition fits. Since it's not a bet the company, last ditch effort, I doubt very much my shares will be affected in the long term by Skype if the investment produces NO additional fees/volume. Ebay has a respected and diligent management team. In spite of this transaction, I have not changed my mind.

Nathanael James said...

It's Strange:

Wasn't it Don Henley of the Eagles who wrote "Learn to be Still?"

Its_strange said...

Yep !! You got it ! It was him ..

Sam S. Park said...

That acquisition price is flat out nuts. How are they justifying the valuation? I could see how the buyers will want to talk to the sellers, especially when they are unsatisfied with the products. "Customers are always right." On the other side of things, sellers will probably hate this idea. Maybe it was a move to weed out the junk sellers... who knows. But $2 to $3 bil... that's one hefty price to satisfy your customer.

And like Dale, I was also waiting for the sequel to the "They Get Paid for This."

Its_strange said...

Barron's Bill Alpert wrote Bob O'Brien ( Phil Saunders ) helped his brother create a webite where you can get your " Apostle personality" for $7.95 . Has anyone besides me looked into this ? ...Its amazing what you will find. Get to work

Jeff Matthews said...

Part II of "They Get Paid For This" was deferred by Hurricane Katrina, but it is in the works.

"All in good time..."

SellToWhom said...

Trying...,

The first hints that all was not right at Ebay came late in 2004 / early in 2005, when they raised their prices. This caused quite an uproar among their professional and small business user base. In order to grow revenues, they found they needed to increase prices, and there was some resistance.

MD said...

I really don't understand the comparison between Fiorina and Whitman.

Fiorina was an overhyped salesperson who came from the troubled Lucent, nearly overpaid for a consulting firm, then had HP, with its legacy of innovation, acquire a troubled firm with a large amount of revenue from commodity businesses.

Whitman had a solid operational background and led a small company to global status. She has had a good record making acquisitions, with Paypal being a homerun. Skype looks like a pricey acquistion, but its integration will hardly pose a threat to EBay's dominance.

What do these two examples have to do with each other than both companies are run by women? A better parallel to the Compaq acquisition would be Sun Micro's purchase of StorageTek. And at the risk of sounding PC, I hate the trend of referring to prominent women by their first names. I don't remember ever hearing Palmisano being called "Sammy."

Jeff Matthews said...

For the record...Gerstner was always "Lou," Welch was always "Jack," Buffett is either "Warren" or "Buffett," and Sun Micro's Scott McNealy is usually "Scott."

At Google it's "Sergey" & "Larry"...not "Mr. Brin" and "Mr. Page.

At Apple it's "Steve" and at Amazon it's "Jeff."

I find no implied sexism referring to Meg Whitman as "Meg" or Carly Fiorina as "Carly."

It just means they're well known.

Its_strange said...

At one point Jim Cramer thought Carly was getting treated unfairly cause she was a lady. Now it seems we simply have enough of everything . Enough computers, enought stores, enough phones ...Its time to be still

Sam S. Park said...

"Jeff" (not hey "Matthews")

Don't feel be rushed to get the part II up on your much appreciated site. I was simply wondering if it was in the works, which you've confirmed. Again, I truly am grateful for your insights.

BelowTheCrowd said...

As a matter of tradition and culture, everything at HP was always done on a first name basis. Carly was treated no differently than anybody else in that regard, going all the way back to "Bill and Dave."

-btc

MD said...
This comment has been removed by a blog administrator.
MD said...

Okay -- maybe I am being a little cranky on first names. I wasn't trying to accuse you of being sexist in my prior post; I was just venting on a personal pet peeve. In fact, a quick perusal of your blog archives yielded a post about Hank and Sandy, which shows your symmetrical use of first names.

My rebuttal is that all these other people are only sporadically called by their first names in print or on television, where the audience may not terribly familiar to the inside baseball of the financial world. But Carly is always Carly. And a certain Senator from NY is almost always Hilary. I suppose the relative uniqueness of their names has something to do with this tendency, but I can't shake the feeling that the exclusive use of these casual monikers ends up being mildly derogatory.

DaleW said...

Fiorina was an overhyped salesperson who came from the troubled Lucent, nearly overpaid for a consulting firm,

OK, point of analysis on this. The reason why IBM's price for PWC only looks lower is partners' compensation under HP's offer was front-loaded while under IBM it's back-ended loaded. Meaning, partners' comp under HP would have been around $500K annually, or so on average, under HP, while it's around $900K or so on average, under IBM. It declines based on profitability under IBM, so in effect it's sorta hard for PWC to miss earning or not to be an earnings cushion under IBM. This is only my speculation, but there is lots of room to play with the gross/net, deferred acquisition consideration under the two offers. CNBC and the sell-side completely missed this element of the story whne IBM did the deal.

mamis said...

The transaction this reminds me of is YHOO buying BCST. As far as I could tell, YHOO got absolutely nothing; it was a straight wealth transfer from YHOO shareholders to Mark Cuban. Not that I blame Cuban -- I blame Ellen "Take the Money and Run" Siminoff. But that's another story.

Skype is a great product...for consumers. Shareholders aren't going to make squat off it.

On a side note: PayPal might have worked out great, but I never understood why Ebay bought rather than built. It's just not a complex piece of code, and there wasn't any IP. (just like with Skype, incidentally)

Its_strange said...

"All in good time" Byrne said something like that on the Jeff / Byrne debate . I'm wondering if Jeff plans on a serious review of OSTK . Certainly one is due .

Manu Sharma said...

> So why she wants Skype is beyond me.

Maybe this will help you see why?

(hint: it's got nothing to do with ebay's auction business)

Harvard Homeboy said...
This comment has been removed by a blog administrator.
Harvard Homeboy said...

<< I don't remember ever hearing Palmisano being called "Sammy." >>

Are you referring to Bart Palmaisano, who runs OCA and who has succeeded in running the company into the ground (from $30 a share a few years ago to $1.30 or so now)?

I refer to him as "Bart" all the time. "Mr. Palmaisano" seems somewhat decorous given the extent of shareholder wealth he's managed to dissipate, not that I care, particularly, since I'm short the stock.

The Madman said...

Whatever technologies Meg wanted out of Skype, she could have licensed it instead of buying it.

eBay is one of those dotcom survivors which survived because of real revenues, earnings and business model.

This reminds me of Compaq/Digital, AOL/Time Warner and yes HP/Compaq.

Delusional Madness