eBay Acquisition Of Skype
eBay Inc. acquired Luxembourg-based Skype Technologies SA, the global Internet communications company, for approximately $2.6 billion in up-front cash and eBay stock, plus potential performance-based consideration. eBay's thought that its global marketplace and payments platform will be strengthened by this acquisition, while creating new lines of business for the company. The deal also represented a major opportunity for Skype to advance its leadership in Internet voice communications and offer people worldwide new ways to communicate in a global online era. Skype, eBay and PayPal will create an unparalleled ecommerce and communications engine for buyers and sellers around the world (Skype 2005).
It is an American Internet company that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide.
The majority of the sales take place through a set-time auction format, but subsequent methods include a substantial segment of listings in the "Buy It Now" category.
In addition to its original U.S. website, eBay has established localized websites in thirty other countries. eBay Inc. also owns PayPal, StubHub, Kijiji, and other businesses (Wikipedia).
Skype Technologies SA
Skype was founded in 2003. It's based in Luxembourg, with offices in Europe, the US and Asia. It is a software application that allows users to make voice calls over the Internet. Calls to other users of the service and, in some countries, to free-of-charge numbers, are free, while calls to other landlines and mobile phones can be made for a fee. Additional features include instant messaging, file transfer and video conferencing (Wikipedia).
Motivation To Bid
Originally eBay was of the opinion that online shopping depends on a number of factors to function well. Communications, like payments and shipping, is a critical part of this process. It will improve and streamline communications between buyers and sellers as it is linked into the eBay marketplace. Buyers will gain an easy way to talk to sellers quickly and get the information they need to buy, and sellers can more easily build relationships with customers and close sales. 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 acquisition also enables eBay and Skype to pursue entirely new lines of business. For example, ecommerce communications could be monetized on a pay-per-call basis through Skype. New categories of communications are opened by Pay-per-call, especially for those 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 (Skype 2005).
Skype generated approximately $7 million in revenues in 2004, and the company was anticipating to generate an estimated $60 million in revenues in 2005 and more than $200 million in 2006. For Q4-05, eBay expected the acquisition to be dilutive to pro forma and GAAP earnings per share by $0.01 and $0.04 respectively. For the full year 2006, eBay expected the transaction to be dilutive to pro forma and GAAP earnings per share by $0.04 and $0.12 respectively, with breakeven on a pro forma basis expected in the fourth quarter of 2006. On a long-term basis, eBay expected Skype operating margins could be in the range of 20% to 25%.
The native value of Skype's unvested common stock options contained in the acquisition totaled approximately $55.2 million and was recorded as unearned stock-based return. The unearned stock-based compensation relating to the unvested options was to be amortized on an accelerated basis over the remaining vesting period of approximately three years.
The estimated useful economic lives of the limited intangible assets acquired in the Skype acquisition were five years for registered user technology and trade names, two years for existing technology, and one year for network access agreements. The final purchase price allocation was to be depended mainly upon the refinement of certain estimates and analyses and the final estimation of certain tax attributes.
Supplemental information on an unaudited pro forma basis, as if the Skype acquisition were completed at the beginning of the years 2004 and 2005, is as follows (unaudited):
Following the most common methods to evaluate business:
1. Adjusted Book Value
2. Capitalized Adjusted Earnings
3. Discounted Future Earnings
4. Cash Flow Method
5. Gross Revenue Multiplier
This is hard to find as which of the methods has been used to evaluate the business. However, the following information is also relevant:
Under the performance-based earn-out, the maximum amount potentially payable was $1.5 billion, and was to be payable in eBay stock or cash, at eBay's discretion, with an expected payment date in 2008 or 2009. Skype shareholders were offered the choice between many consideration options for their shares. Shareholders representing the remaining 60% of the Skype shares chose to receive a reduced up-front payment in cash and eBay stock at the close plus potential future earn-out payments which were based on performance-based goals for active users, gross profit and revenue. Shareholders representing approximately 40% of the Skype shares chose to receive a single payment in cash and eBay stock at the close of the transaction. (eBay 2005).
eBay bid for all outstanding shares of Skype for a total up-front consideration of approximately $3.2, however later on the price finally reached on at $2.6 billion, which was comprised of $1.3 billion in cash and the value of 32.4 million shares of eBay stock, which were subject to certain restrictions on resale.
As per an article published on TechCrunch, Skype has been a financial load around EBay's neck. eBay also negotiated down the vast earn out due to Skype stockholders and took a $936 million one-time loss around the transaction. Shares of eBay, which had shoot up more than 20% in the last six weeks, were trading down $2.57 at $38.03 in Oct 2007. For the quarter ended Sept. 30, eBay reported a net loss of $935.6 million, or 69 cents a share, compared with earnings of $280.9 million, or 20 cents a share, for the same period last year.
The results include a formerly disclosed charge of $1.39 billion associated to the company's acquisition of Skype. Also included are charges associated to stock-option compensation and other items. The charges include $530 million to complete payments correlated to its acquisition. The other roughly $900 million in charges reflect goodwill impairment due to "the updated long-term financial outlook for Skype" (Wall Street Journal).
It's time for the shareholders of eBay to get mad about the incompetency of the management. First they paid top dollar for Skype back in 2005, now instead of waiting for an opportune time to go public, eBay management is selling low, at a time when the only buyers are bargain hunters.
The shareholders of eBay, who paid to buy Skype, later on afford to get their share prices reduced as a result of continueos losses.
Tata Motors Acquisition Of Jaguar and Land Rover
According to the Times of India, Tata actually negotiated between 15 and 20 deals with Ford before completing the acquisition of the two British brands - Jaguar and Land Rover (JLR) from Ford Motors for US$ 2.3 billion in June 2008. This will help company acquire a global footprint and enter the highly premier segment of the global automobile market. After the acquisition, Tata Motors would own the world's cheapest car - the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land Rover. Ownership was not considered a major issue at all though there was early disbelief over an Indian company owning the luxury brands.
The Indian auto company Mahindra & Mahindra was also one of the bidder for Jaguar and Land Rover, as is a private equity group
Tata Motors Ltd is the largest automobile company of India. It was established in 1945. In 2008-2009, its consolidated revenues were Rs.70,938.85 crores (USD 14 billion). It is the fourth largest truck manufacturer and second largest bus manufacturer in the world. It is also listed in New York Stock Exchange. Tata Motors has operations in UK, South Korea, Thailand and Spain. It acquired South Korean's Daewoo Commercial Vehicle in 2004. The Company further acquired Hispano Carrocera (a Spanish bus and coach manufacturer) with a 21% stake, following by completing full acquisition in 2009. The Company has entered into various joint ventures with many companies such as Brazil-based Marcopolo, Thonburi Automotive Assembly Plant Company of Thailand (Tatamotors).
Jaguar And Land Rovers
Jaguar and Land Rovers were two subsidiaries of Ford Motors, listed on London Stock Exchange. Jaguar was established in 1960 and acquired by Ford in 1989. In 1996, Jaguar formed British Motor Holdings by merging with the British Motor Corporation (BMC). Land Rover was established in 1948 in UK. Land Rover has been closely associated with Jaguar since its purchase by Ford in May 2000. They share a common sales and distribution network (including shared dealerships), and some models now share components in many countries. In 2007, it was sold to Tata Motors Company.
Tata Motors' of Indian had a net loss of Rs25.1bn ($524m) by a 32% fall in sales volumes at Jaguar and Land Rover combined.
Land Rover had most worst hit with a fall in sales of 39%, while Jaguar fell only 4%, rescued by the release of a popular new model.
Tata Motors' stock has fallen about 13% and 25% in 12 months since the deal was completed. The Sensex Index has gained nearly 5% in the same period, and the benchmark dropped 0.4 per cent (Financial Times 2009).
Tata group has injected £821m ($1.35bn) to cover losses into its new acquisition. The Group has also been left a debt overhang, with 50% of its Rs163 bn of debt due by 2011 because of the purchase.
The sales of Jaguar cars fell 20% between October 2008 and March 2009, while Land Rover sold 51% fewer sport-utility vehicles in the same period.
Moneylife online magzine elaborates more about diminishing value of Tata Motors share in January 2010. Tata Motors had issued 6.41 differential voting rights (DVR) shares in November 2008 to collect Rs.4,415 crore as a part of its plan for repaying the loans taken to complement acquisitions. The price of DVR shares at the time of issue was Rs.305 as compare to Rs.340 for ordinary right issue share. Unabling to maintain its value, DVR is currently trading at Rs510 against the normal stock price of Rs.812, with discount as high as 40%.
From such post-acquisition results and segmented analysis, it is clear that the acquisition of Jaguar and Land Rover was not healthy, resulted a decline in the value of Tata Motors DVR share price. Hence, its shareholders paid reletively high price for Jaguar and Land Rover.
Baker Hughes Acquisition Of BJ Services
Baker Hughes Inc. acquired BJ Services Co. for $5.5 billion on 31 August, 2009. This is considered the biggest oilfield-services company takeover since 1998. The price includes a 16% premium to BJ Services' stock price on Aug. 28 and will give a share of 27.5% outstanding shares of Baker Hughes to BJ Services stockholders. BJ Services shareholders received 0.40035 share of Baker Hughes's stock and a cash payment of $2.69 a share in exchange of each share of BJ Services. As a result, the stakeholders of BJ Services will own 27.5% of Baker Hughes outstanding shares.
BJ Services Company was founded in 1872. Its headquarters located in Huston, Texas. It is listed on the New York Stock Exchange with operations in 50 countries world wide and earned revenue of $4,122 million in 2009. The Company's core business comprises downhole tools, cementing, stimulation and coiled tubing services worldwide. BJ also provides chemical services, tubular services, process and pipeline services, and specialty in selected geographic markets.
Baker Hughes bought the company on 31 August, 2009 for $5.5 billion stock and cash deal.
Baker Hughes is the third largest oilfield company of the world. It is involved in the business of providing the products and services for drilling, production and reservoir consulting, formation evaluation, completion to the world's oil & gas industry. Baker Hughes has its headquarter in Houston with operation in over 90 countries worldwide mainly based in countries with a mature petroleum industry. The company earned revenue of $15,875 and assets worth $11,861 in 2008.
Motivation To Bid
Baker Hughes customer satisfaction trends were noted to have been somewhat problematic over the last few years, similarly the ratings of BJ Services have also begun to deteriorate as of late. Baker Hughes characteristically rated above Halliburton and Schlumberger in large part because of a focused approach and well defined culture in 2004 and 2005.
However, its ratings lead vanished over the last few years. In fact, the company is now rated closer to the middle of the pack in key product and service categories in some markets.
Pressure pumping, which is a tiny source of its revenue accounted for less than 1% of revenues of Baker Hughes in 2008. However, the combined company's revenues are expected to generate up to 20%, that approaches its two largest competitors.
The number of fields requiring pressure pumping services is likely to grow, especially outside of North America, where BJ Services can pull up Baker Hughes' extensive international presence as it pursues growth opportunities, it added.
Baker Hughes now expects that the acquisition will eliminate redundant costs, consolidates facilities and rationalizes field costs, which will realize an annual cost savings of approximately $75 million in 2010 and $150 million in 2011.
Baker Hughes Inc. acquired BJ Services Co. for $5.5 billion on 31 August, 2009. This is considered the biggest oilfield-services company takeover since 1998. The price includes a 16% premium to BJ Services' stock price on August 28 and will give a share of 27.5% outstanding shares of Baker Hughes to BJ Services stockholders. BJ Services shareholders received 0.40035 share of Baker Hughes's stock and a cash payment of $2.69 a share in exchange of each share of BJ Services. As a result, the stakeholders of BJ Services will own 27.5% of Baker Hughes outstanding shares.
The deal is completed but expected to be formalized by April 2010. Since, the deal has not accrued yet, therefore, post acquisition results are not available. However, based on the individual performance of both companies, we can predict the results of acquisition. Baker Hughes fell 9.6% or $3.64, to $34.45 in composite trading on the New York Stock Exchange. BJ Services rose 63%, or 4.1 percent, to $16.06.
The above acquisitions fall into following categories:
The above table clarifies the purpose of acquisition up to some extent and may be useful to access the motives behind these acquisitions as per latest study conducted by Michael Porter.
Researches back in 1970s evident that mergers and acquisitions have an unfavorable impact on profitability. They are strongly associated with lowered productivity, labor unrest, higher absenteeism, and poorer accident rates. Depending on which study one reads, 50% to 80% of all mergers and acquisitions turn out to be financially unsuccessful. If this was really the case, then a question arises, that why the acquisitions are more popular today than ever before.
In our analysis we have also found that most of the acquisitions are not successful financially. But still acquisitions are treated important because managers normally have various motives for mergers, such as increasing sales, obtaining needed competencies and improving the image of the firm. Likewise, in the case of Tata Motors, one of their motives was to establish their footprints in Europe, in which they can be succeeded in the long run though the acquisition has not been financially sound for them for the time being. Some time companies deliberately pay higher costs to achieve their motives. The premiums normally be paid by strategic investors who are motivated by synergistic motives.
Considering above facts, we can conclude that price paid is usually excessive where acquisitions lead to financially failure but this does not mean that many corporate acquisitions lead to an erosion of shareholder value because some time companies achieve their motives by through acquisitions.
Wall Street Journal. (Eastern Edition). New York, N.Y.:Oct 18, 2007. p. A.3
Santanu Choudhury. Wall Street Journal. (Eastern edition). New York, N.Y.: Aug 12, 2009. pg. B.4
Weisbah. Michael S and Kaplan. Steven N, 1992, The Success of Acquisitions: Evidence from Divestitures, Journal of Finance 45 no. 1, pg. 107 - 138.
Grant, R. (2008), Contemporary Strategy Analysis, 6th edition, Blackwell Publications
Pike, R and Neale, B. (2009), Corporate Finance and Investment, 6th edition, Prentice Hall
Johnson, G,, Scholes, K. and Whittington, R. (2008) Exploring Corporate Strategy, ed 8, Pearson
CNet News (2007) Skype = failed acquisition for ebay [online] available from <http://news.cnet.com/8301-13505_3-9788997-16.html> [20 February 2006]
Skype (2005) eBay to Acquire Skye [online] available from <http://about.skype.com/2005/09/ebay_to_acquire_skype.html> [20 February 2006]
Ebay (2005) eBay completes acquisition of skype [online] available from <http://investor.ebay.com/releasedetail.cfm?ReleaseID=176402> [20 February 2006]
TechCrunch (2008) Google / Skype Acquisition or Partnership Imminent [online] available from <http://www.techcrunch.com/2008/04/01/googleskype-acquisition-or-partnership-imminent/> [20 February 2006]
Market Watch (2007) EBay share drops following earnings report [online] available from <http://www.marketwatch.com/story/ebay-shares-take-hit-on-worries-about-core-business> [20 February 2006]
Gigaom (2009) Skype Sales Near: Why eBay Shareholders Should be Made [online] available from <http://gigaom.com/2009/09/01/ebay-skype-sale/> [20 February 2006]
CNet News (2009) Sold! eBay Jettisons Skype in $2 billion deal [online] available from <http://news.cnet.com/8301-1035_3-10322833-94.html> [20 February 2006]
Finance Times (2008) Investors concerned about Tata Motors deal [online] available from <http://www.ft.com/cms/s/0/349a5ff8-fc21-11dc-9229-000077b07658.html> [20 February 2006]
Financial Times (2009) Land Rover and Jaguar drag on Tata [online] available from <http://cachef.ft.com/cms/s/0/62faa3be-6663-11de-a034-00144feabdc0.html> [20 February 2006]
Moneylife (2010) Tata Motors DVR shares trade at 40% discount, analysts foxed [online] available from <http://www.moneylife.in/article/81/3099.html> [20 February 2006]
Seeking Alpha (2009) Thoughts on Baker Hughes' BJ Services Acquisition [online] available from <http://seekingalpha.com/article/159301-thoughts-on-baker-hughes-bj-services-acquisition> [20 February 2006]
Bloomberg (2009) Baker Hughes to Buy BJ Services for $5.5Billion [online] available from <http://www.bloomberg.com/apps/news?pid=20601087&sid=aqw59sJNE8PA> [20 February 2006]