This article is written by Milendra Jain who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.
Table of Contents
Introduction
Have you ever given a thought to, “Why do companies enter into Mergers & Acquisitions (the “M&A”)? or “What factors influence M&A?”. Answer to these questions lies behind the underlying synergies, sustainable growth and value creation through these transactions. M&A is also attractively because it can close swiftly and efficiently without much interrupting current operations.
However, there have been several cases where M&A deals didn’t work out and the main evil behind such failure is that the companies are unable to meet post-closing integrations, therefore, not able to achieve and ascertain synergies, sustainable growth and value creation, which usually motivates M&A. Therefore, this article tries to analysis the failure of the deal between eBay and Skype.
Why Merger and Acquisitions?
Globalization has deeply impacted the business landscape over a few decades. This resulted in a more strategic M&A as no company can expand its business through organic growth by enhancing sales internally and increasing output. Therefore, in order to achieve growth, various companies started strengthening their business through inorganic growth strategies.
M&A are the transactions in which various companies are either consolidated or their ownership is transferred to another company. One of the basic reasons behind such transactions is creating an additional value called “Synergy Value” combined with various strategic reasons. The Synergy Value combines the power or value of the two companies involved in a transaction to leverage the positions of the companies involved.
The benefits of M&A include, among others:
- Diversification of the business.
- Value Creation
- Acquiring new technology and expertise.
- Larger share in the market.
- Increasing capabilities.
- Financial benefits.
- Eliminating competition.
Background of the Deal – eBay and Skype
eBay is a commerce company founded in 1998 in California, with the aim to connects sellers and buyers around the world through an online platform. Skype Technologies (the “Skype”) is a technology company that enables a person to make free video and phone calls through a voice over internet protocol (the “VOIP”).
In 2005, an online e-commerce company eBay acquired Skype Technologies, a European VOIP provider for USD 2.6 Billion. This deal becomes one of the talking points at that time as the price on which Skype was purchased was extremely high, given that skype manages to produce USD 7 Million in revenue.
The rationale behind this deal was to promote the synergies between the company and to integrate the technology of both companies in order to increase and expand user growth engine asset and eBays alliances.
However, eBay had been successful with dealing with PayPal in past, as PayPal was acquired by eBay in 2002 for USD 1.5 Billion which was another most expensive investment made by eBay. However, by the end of 2004, eBay succeeded to integrate PayPal into its business model. In 2005, with the same vision in mind, as to expand its business operations via means of VOIP communication, eBay approached Skype to fulfil its vision and acquired Skype in a high price auction.
Aims of the Deal – eBay and Skype
Following are the aims of the deal:
- eBay saw Skype as a means to increase the numbers of members into eBay’s business structure as Skype has tens of million active users.
- As Skype emerged as a popular means of communication through VOIP, eBay saw this technology as it can bring many new members into its domain and such means can act as a strong method of communication between its members for buying and selling.
- eBay aimed to integrate Skype into its commerce world with an objective to enhance online users experience as a quick way of communication.
- Skype was bought for eBay’s users as this would help in generating more customer loyalty and would increase the velocity of the trade among its users.
The outcome of the Deal?
The users of eBay rejected the Skype technology as a mode of communication and considered as unnecessary for communication between its users. EBay was unable to integrate Skype into its business structure. Post acquiring the Skype, eBay does not chalk out a plan to utilize the Skype, as there was no information with the users how to utilize the Skype, except for the option to contact through Skype and the Skype users have no knowledge that Skype and eBay were connected. The Synergy which was depicted by eBay unfortunately never happened.
Further, two tears after acquisition i.e., in 2007, due to the failure of the deal, eBay came up with an option to write down the value of Skype by USD 1.4 Billion. However, Skype continues to perform alone as its revenue increase to USD 170 Million with a growth of 25% and added more than 37 million users in its VOIP technology reaching to 480.5 million registered users.
Further in 2009, eBay Board roll out the intention to divest Skype because of the lack of synergies between the eBays and Skype and to focus on its core business. A meanwhile the Skype was also facing various challenges and Ip litigation. eBay was able to sell the majority of the stake in Skype to an investor group for a transaction value amounting to USD 2.75 billion and eBay retains a significant minority stake in Skype. Further, in 2011, eBay sold its remaining 30% stake in Skype to Microsoft for USD 8.5 billion and realised a net gain of more than USD 1.3 billion on its original investment in Skype.
Why eBay-Skype Deal fail?
M&A has been always considered as an inorganic strategy that creates synergies between the companies aimed to achieve growth that is much faster than organic growth. However, it always brings a great amount of risk and it can lead to the failure of such a deal and destroying the shareholder value. Similarly, the deal between eBay and Skype failed because eBay was unable to integrate Skype into its business. As, eBay has overestimated the synergies and the purchase price for Skype was extremely high, comparing its revenue only amounts to USD 7 million. Furthermore, the cultural differences between the two companies were too different to align into one culture.
Moreover, the following are the reasons which lead to failure of the deal:
- Overpaying.
- Insufficient due diligence.
- Overestimating synergies.
- Cultural differences.
- Poor integration.
- Lack of management involved.
- External factors.
- Lack of a strategic plan.
- Misunderstanding the target company.
Considerations for Post M&A Integration
Often, the non-integration of the businesses often leads to the failure of the deal. Post-M&A integration of the business is a critical process wherein businesses are aligned with an aim to maximize potential synergies. Therefore, the following are some key points that are required to be considered for a successful post-M&A integration:
- Tailoring the actions in such a way is in line up with the nature of the deal.
- Resolving the power and people issues quickly and appointing the Post-Acquisition Integration Team.
- Developing an overall integration plan.
- Establishing Communication Strategy.
- Starting integration at the time of announce of the deal.
- Committing to one culture or Cultural Alignment.
- Value construction:
- Identification of cost and revenue synergies.
- Cost and revenue goals.
- Customer transition plan.
- Fulfilling Compliance, Regulatory and Antitrust issues.
Conclusion
The most basic objective of the M&A deal is to leverage the synergies created through the combination of two companies. However, sometimes M&A could break or make a company because of the risks associated with such inorganic growth. Therefore, if the company fails to integrate both companies then M&A will fail. eBay had invested in Skype in order to leverage the use of the technology of Skype for increasing its commerce business, however, eBay was unable to integrate both businesses which resulted in a massive write-down of the value of the Skype. Therefore, it is essential to chalk out the integration plan and creating a strategy that can mitigate the risks associated with the M&A deals. Thus, various factors must be considered while entering into a deal and developing a constructive strategy to integrate the business.
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