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September 12, 2005

Online auction giant eBay (Quote) is expanding its communications services with a $2.6 billion cash and stock deal to acquire Voice over IP darling Skype Technologies.

In announcing the deal Monday, which had been rumored for weeks, eBay said the acquisition of the Luxembourg-based Skype would strengthen eBay’s global marketplace and payments platform. Plus, it’s keen to open several new lines of business for both companies.

EBay’s user base of 157 million could be a perfect fit for Skype’s telephony software, allowing users to talk to other users at no extra cost. In addition, the companies said the deal gives Skype an opportunity to advance its Internet voice communications services.

The deal represents a heady zenith for Niklas Zennström and Janus Friis, who founded the fast-growing Skype in 2002. Beyond its free PC-to-PC calling service, voicemail, instant messaging, call forwarding and conference calling, Skype offers a paid calling service, called Skype-out, that connects PC callers to traditional landlines and mobile phones.

It is also gearing up for a video Voice over IP launch, as well as preparing to roll out expressive content such as avatars, and customized toolbars for Outlook and Internet Explorer. The video VoIP launch alone could help add more velocity to eBay’s sales of goods that need more than a picture to help push a sale.

Skype counts 54 million members in 225 countries and territories and said it is currently adding about 150,000 users a day.

The merger of the two companies would give eBay buyers and sellers an easy way to talk to each other, as well as build relationships. “As a result, Skype can increase the velocity of trade on eBay, especially in categories that require more involved communications such as used cars, business and industrial equipment, and high-end collectibles,” the companies said.

Plus, eBay and Skype could pursue new business lines by providing a way to monetize e-commerce communications on a pay-per-call basis through Skype, “especially those [eBay] sectors that depend on a lead-generation model such as personal and business services, travel, new cars, and real estate. eBay’s other shopping websites – Shopping.com, Rent.com, Marktplaats.nl and Kijiji – can also benefit from the integration of Skype.”

Communication is at the heart of ecommerce and community, Meg Whitman, President and Chief Executive Officer of eBay, said in a statement. “By combining the two leading ecommerce franchises, eBay and PayPal, with the leader in Internet voice communications, we will create an extraordinarily powerful environment for business on the Net.”

Zennström, Skype CEO and co-founder, said the company’s vision for Skype has always been to build the world’s largest communications business and revolutionize the ease with which people can communicate through the Internet. “We can’t think of any better platform to fulfill this vision to become the voice of the Internet than with eBay and PayPal.”

Zennström and Friis are to remain in their current positions; Zennström will report to eBay CEO Whitman and join eBay’s senior executive team, the companies said.

The deal calls for eBay to acquire all of the outstanding shares of the privately-held Skype for a total up-front consideration of about $2.1 billion, with some earn-out provisions attached. The sale consists of $1.3 billion in cash and the value of 32.4 million shares of eBay stock, which are subject to certain restrictions on resale. The companies said the maximum amount potentially payable under the performance-based earn-out is approximately $1.2 billion, or approximately $1.5 billion, and would be payable in cash or eBay stock, at eBay’s discretion, with an expected payment date in 2008 or 2009.

More details about the merger are slated for discussion during a teleconference this morning.

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