Ebay, the online auction house, announced a $1.43 billion write down related to its acquisition of Internet phone company, Skype. Skype has not lived up to the commercial expectations associated with Ebay's purchase back in 2005.
While $1.43 billion is a lot of money, it will do little real harm to Ebay -- which has a $54 billion market cap and is trading near its 52 week high. Wall Street takes big write downs like this in stride; often having already reflected anticipated bad news into a company's share price. For example, yesterday Citigroup took a $5.9 billion charge related to write down of corporate loans and mortgages. Yet, Citigroup's shares actually rose by about a dollar.
In the M&A frenzy of Web 2.0, it is buyer beware. Skype now has over 220 million users worldwide. But since it doesn't charge for phone calls between Skype users, the company has had difficulty converting this user base into profitability. To gauge a company's true value, acquirers are once again looking at benchmarks such as revenue growth, profit margins and business models.
"How do you make money" is once again a fashionable question to ask. Otherwise, you might end up paying twice as much as you should for a company as Ebay did for Skype.
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