eBay & Skype: Impairement Charges & The Like
eBay took an “impairment” charge for the Skype acquisition today of $900M . . . its totally hilarious how people that do not really understand accounting & finance are interpreting this action.
First of all, here is a technical definition of impairment charge. In short, when Company A buys Company B. Any amount of the purchase price above what the book value of Company B is put onto the balance sheet as goodwill. That goodwill is charged as a deduction from earnings every quarter for up to 40 years (something like that).
By reducing $900M from the goodwill of the Skype transaction, eBay is taking that one time hit this current quarter while decreasing its future goodwill amortization amount in earnings.
Couple important back of the envelope calculation first. . .
Skype was bought for $2.6B in 2006. The earn out ended up being $530M. Not taking into consideration time value of money, the total acquisition cost was around $3.1B.
Skype is doing about $90M a quarter. Conservative projection would be that Skype is on track to about $500M in revenue for the forward 4 quarters. Given that these are probably high margin revenue (p2p means no hardware cost), I would give the company a conservative revenue multiple of 10x. (aQuantive was bought for 7.6x revenue multiple - a much lower margin business). The resulting number would be that Skype is probably worth around $5B TODAY.
Ok, so eBay probably overpaid for Skype 2 years ago. But today Skype is certainly worth more than that acquisition price. So the question than becomes, why is eBay taking $900M impairment charge?
hmm . . . thus goes the intrigue . . . . if you guys noticed, eBay stock price started down after the news, but actually went up afterwards. For the fundamental investor, the explanation would be that Skype as a failure is already priced into the stock price. I, on the other hand, believe in the power of market manipulation investor relations :) . . . i.e. eBay got on the phone with institutional investors after the announcement and detailed the rationale of the write down and the going forward financial strategy for the company. The mutual funds must have liked what they heard and bought up the stock.
I don’t want to insinuate anything but write downs are a well-known financial engineering instrument. . . it has absolutely nothing to do with admiting failure or not on an acquisition. The “when” is much more important than the “why”.
I’ll say this. eBay WILL exceed earning estimates for the next 2 quarters. Either they are so confident of the future to take this hit today.