The best line about the whole Skype saga has been that “everyone who has ever done a deal with the Skype guys has walked away unhappy.” I think it came from Tech Crunch.
Now, Index Ventures and alleged slime ball Mike Volpi are out, and in their place comes the original dashing duo.
Read more. But I wonder, how long before Volpi leaves Index to “spend more time with his family?”
And seriously, what is wrong with a VC like Index to begin with?
Background
Mike Volpi was the executive at Cisco who ran M&A for John Chambers. His recommendations made millions for others (whose companies Cisco acquired) and helped make Chambers more and more powerful. Over time, he was asked by the founders of Skype, Janus Friis and Niklas Zennstrom, to sit on their board.
Then, Skype is acquired by eBay for over $2B in 2005, Friis and Zennstrom retain the underlying P2P platform, called Global Index, through their ownership of Joltid. In the sale to eBay, investors Index Partners and partner Danny Rimer make a killing.
Joost is Hatched, and Flops
Friis and Zennstrom launch Joost, a video P2P platform, using the same Global Index platform. Company raises $45M from a blue-chip roster of investors including CBS, Viacom, and many others.
Eventually, they recruit Volpi to become the CEO of the fledging video startup. Volpi, Friis and Zennstrom realize that the NBC/News Corp.-backed hulu has stolen their thunder and try to right the ship, by dumping the software client distribution model and adopting a browser strategy. By then, Joost hits considerable headwinds and decides to dump the consumer strategy and focus on white label licensing.
Back to Skype, but How?
Friis and Zennstrom wonder what to do next. Their focus shifts to their one main hit: Skype, currently in eBay’s hands. Volpi, meanwhile, wonders if he did the right thing by leaving the friendly confines of corporate life for the rough and tumble world of startups.
All equally troubled by the turning of events, they meet to explore their options. How crazy would it be for them to hatch a plan to reclaim their crown jewel Skype… but how to do without triggering a bidding war with corporate and private equity giants?
The Plan?
Since Joltid retained the source code for Skype, eBay only had access to an executable program. They probably ask Joltid for the right to tweak the software, Joltid ignores their request or outright denies it. Fearing the worst, eBay starts to tinker with the code, Joltid jumps on opportunity to claim that eBay is violating the terms of the license, they sue to prevent eBay from both tweaking the license AND from selling Skype to anyone else (Google, MSFT, etc.).
Fearing that they might lose the case to eBay, how crazy would it be for Friis and Zennstrom to offer Volpi an offer he could not refuse:
Use confidential material information to sell Skype to a third party by convincing them that he had the secret formula to get around the technical challenges posed by relying on the Global Index, but leave enough of a trail so that Joltid could pursue Volpi and the new buyers Volpi shepherded to ultimately force eBay to instead sell Skype at a steep discount to them as part of a settlement?
This way, Friis and Zennstrom did not have to enter into a bidding war against the much deeper pocketed Google and Microsoft, and private equity players that would underwrite this plan would be once bitten, twice shy about pursuing Skype as well?
You could argue, would Volpi do this?
Honestly, I don’t think so. I also don’t think - judging from the legal documents that Friis and Zennstrom unleashed on Volpi - that this is a case of three buddies hatching a grand scheme, but it does make for a great movie script, doesn’t it?
- Volpi stinks just as much as Friis and Zennstrom.
- Skype Founders Are Destroying Their Reputation and Ability to Recruit and Invest in Talent.
- Joltid jilted eBay, Twice?
Yesterday I suggested that Janus Friis and Niklas Zennstrom are better off letting bygones be bygones, but today the Skype saga got juicier and Mike Volpi is painted as the main culprit.
From GigaOm:
The gist of the lawsuit is that Volpi learned how to modify Joltid’s proprietary software to run on the web without the aid of a peer-to-peer software when he was transitioning Joost from a peer-to-peer service to a web-based Hulu clone. And with this knowledge, he was able to pitch a version of Skype that buyers could take over from eBay while side-stepping ongoing litigation.
(…)
“Volpi and Index lacked the credibility and financial heft to lead a private equity investment consortium to acquire Skype unless and until they advertised their knowledge of the Confidential Information.”
“In a very short time, Volpi burned through a substantial amount of the working capital available to Joost at the time he became CEO. Moreover, he had removed from Joost a significant portion of Joost’s innovating and market-driving technology, leaving Joost to rely on third-party technology products. Volpi’s overall business strategy failed. Moreover, it was a failure that was extremely expensive, with Joost expending tens of millions of dollars of investors’ capital.”
—Volpi is described as “a faithless fidicuary” who “took advantage of the trust and confidence placed in him to steal confidential, highly proprietary information relating to an extremely popular Internet-based technology, as well as other strategic, commercially valuable and sensitive information.” As president and CEO of Joost, Volpi, they claim, had access to info from both Joost and Joltid—including the Global Index P2P software that powers Skype and other Zennstrom-Friis efforts. Joost had the source code; Skype had more limited access—an executable-only code form of GUI. (That’s the license that is being litigated in the UK between eBay and Joltid; Skype’s continued use of the code is the subject of the copyright infringement case.)
and Tech Crunch re: the technical aspect of why Skype could never open up to developers:
A source code version of the GI Software is licensed by Joltid to Joost, allowing Joost to be the first company to successfully deliver television and other video content in real-time over a peer-to-peer network. An executable-only object code form of the GI Software was licensed by Joltid to Skype, a well-known Internet-based company that provides users throughout the world with free or low-cost telephone services over the Internet. Skype did not obtain a license to the GI Software source code, however, and the license it did obtain was terminated based on Skype’s breaches of the license agreement.
This is getting ridiculous. Is there anyone in this saga that doesn’t stink, basically?
Kazaa/Skype/Joost - and I guess Joltid - founders Janus Friis and Niklas Zennstrom are richer than God. Let’s get that out of the way.
Kazaa was a disruptive and destructive force in music that took the baton from Napster after the RIAA killed the popular file sharing software. But Kazaa’s fate was no different than Napster’s.
Skype, on the other hand, was not only disruptive but also wildly profitable. The duo cashed out admirably in a sale to eBay. It turned out, of course, that eBay bought everything but the underlying technology.
Joost was a disaster from Day 1, and as one of WatchMojo.com’s distribution partners, that was clear from Day 1. We try to tell them all of the things they were doing wrong, to no avail.
Regardless, even if every other project they touch fails, they have made their mark - and earned their fortunes - with the sale of Skype. However, I wonder if this has made them lose their senses.
In fact, I think that it’s a good thing that they two seem to have begun to focus on investments through their Atomico Investments, because I think they are damaging their own reputation as entrepreneurs and businessmen with the way they have handled everything since the sale of Skype.
For one, selling eBay the company without the technology is just bad form, even if the clueless Meg Whitman didn’t see a problem with this. I understand Friis and Zennstrom planned to use the underlying Joltid peer-to-peer Global Index technology for subsequent projects, including Joost, but it is simply bad form. What they should have done is worthy of a separate article.
However, the fact that they are now suing former Joost CEO and Chairman Mike Volpi is also bad form, because I don’t think that they will be able to recruit as many would-be CEOs in the future. By the looks of it, if what they allege is true, Mr. Volpi has also acted questionably, but at some point, you cut your losses and walk away.
As an entrepreneur, I inquired with Atomico way back in the day (full disclaimer: Atomico since invested in DECA, another content producer, though in no way really competitive with WatchMojo.com), but seeing how they have gone about this eBay/Volpi mess… you have to ask yourself, if you are an entrepreneur, does this saga make you more or less interesting to partner with them?
If they are now investors, the answer to that question should trouble them.
Here is my interview on Business News Network to talk about the eBay sale of Skype, watch it here.
eBay makes it official, here is the press release, here are some thoughts on the deal.
Q&A:
Q) They’re buying it at $2.75B – is that price tag too hefty?
Well, eBay overpaid for it back then, so while the business has grown the economic reality is less hype-ish and businesses are judged more on the P&L. But ultimately, in an M&A, it’s a combination of what a seller wants to let go of an asset and what the market will pay for it: eBay’s CEO had recently said that $2B was too low and since a private equity firm stepped in to make it happen, $2.75B seems logical given all of these variables.
Q) Why does this deal make any more sense than when Ebay bought Skype, (other than a lower price tag)
eBay made no sense but the notion that adding call options would increase sales and conversion was plausible. Ultimately, it wasn’t. The failed merger had more to do with culture and management than strategy, though. This can make sense if the right people step in. Skype, however, is no longer on the cutting edge of technology, in fact, they have fallen behind on some major opportunities they had.
Q) Are they angling for a potential IPO?
Yes, definitely.
Q) What about Ebay? How would unloading Skype affect Ebay stock (short and long term)?
The litigation involving Joltid was going to freeze the company from IPO-ing Skype or doing much to bring in more talent. Ultimately this is a distraction for eBay, which should focus on Paypal anyway.
Q) What’s the future for Skype?
Content sharing network + communications platform.
Q) eBay is keeping 35%, why?
It’s a tacit admission that eBay remains bullish on the future of Skype but is honest enough to say they’re not the best at maximizing value.
It’s also a sign that the market is not giving them the price they wanted for a full sale, so this way, they get some cash and keep some chips on the table.
I mean, people will forever think eBay was dumb in buying Skype, they don’t want to be known as twice as dumb for also selling it before someone else cashes big time.
Everything boils down to timing: a few years ago, as a publicly traded company, Doubleclick was in the gutter. A PE firm took them private for $1B and then a couple of years later, Google bought them for $3.1B. By and large, this was the same company, but the mood of the market had changed.
It is astounding that eBay forked over $3B for Skype and didn’t actually buy Skype’s underlying technology.
It is amazing that they didn’t realize this and outright criminal that they didn’t get a fully-paid, irrevocable, perpetual, non-exclusive (exclusive for the purposes of international calling) license.
Om Malik has all of the links you need:
- Skype Founders suggest they still own underlying technology to Skype
- Will Joltid turn eBay’s planned Skype IPO into a nightmare?
- Why eBay Should Accept Skype Founders’ Buyout Offer.
Now this will probably get settled one way or another, and as a non-Skype user, non-eBay shareholder, I don’t really care either way.
But a few points:
- this proves that just because you hire expensive lawyers doesn’t mean anything.
- One more example of upward failing, and to think this woman, Meg Whitman, could have been our Treasury secretary. I am sorry how wonderful Ms. Whitman was, this was done on her watch and it’s just appaling in terms of botched due diligence.
- With all due respect to Skype founders Niklas Zennstrom and Janus Friis, you have to wonder, will anyone ever buy a company from them again? I mean, sure Viacom/CBS and a number of VCs invested in their next venture Joost (hmm… is there such a thing as karma?), but this was before this bit of news was out. Ultimately, I am not sure I would have a lot of comfort and confidence doing a deal with these guys.
And in a related story, Skype’s co-founders Niklas Zennstrom and Janus Friis, who sold the VOIP pioneer to eBay for $2.4B - $4.1B (time of purchase - final) are in talks to re-acquire Skype from eBay.
Oh, the two launched Joost, which has probably not matched the hype with which it launched.
In as much as Skype was a classic text book case of how to scale a web startup (come to think of it, I am shocked I didn’t put it in our Top 13 Explosive Web Startups of All Time), Joost makes the list of everything that can go wrong with a startup.
However, the fact that the two are publicly seeking to buy back Skype says as much about Joost as it does about Skype. One has to wonder, why not go sit on a beach, or invest in other projects via their Atomico fund?
Yes, the title of this post is meant as a joke.
The following is a perpetual-work-in-progress. Once you start to compile a list of mergers and acquisitions, you realize why it’s nearly impossible to have a complete list. We are quite confident that the following is a very good, comprehensive list of the largest, more notable deals… but it is not - and no list will be - fully complete because there are too many countries around the world and too many industries to report (it is highly possible that the Wall Street Journal or Financial Post, for example, has such a list… but it would be thick and unwieldy).
We have included:
- many industries
- have not adjusted for inflation
- mergers (be it all cash, cash/stock, or all stock)
- acquisitions (we have excluded partial acquisitions)
- private equity deals.
It is certainly not complete, send me any ones you think I am missing or industries you want us to add next to ash@mojosupreme.com or leave in the comments.
Trivia:
- In 1981, when DuPont acquired Conoco for $7.8B, it was the biggest deal of all time. But adjusted for inflation, that remains a $20B deal by 2008 standards.
- KKR’s private equity deal for KKR remains the biggest buyout when adjusted for inflation, but in actual dollars it has been long surpassed.
Related on HipMojo.com:
When eBay paid $2.6B for Skype - with earnouts potentially making the deal go as high $4.1B - people wondered: WTF?
Truth is, that as the leading person-to-person commerce site (that would be eBay), to acquire and integrate the leading VOIP communications platform (that would be Skype), it made a lot of sense.
Did Skype co-founders Janus Frist and Niklas Zennstrom do a great job of selling their vision to maximize shareholder value? Hell yeah, and good for them. In fact, I’d say they did an even better job of selling their vision for Joost (disclaimer: WatchMojo.com is a content provider to Joost), for which they raised $45M in financing from well-tailored institutional investors Sequoia and strategic investors CBS et al.
After all, Skype was the dominant player in Voip and #8 on CNET’s Top 10 Downloads since 1996, whereas Joost was one big fat pie in the sky, facing macro-level constraints (that would be broadband not being there yet in the US) and micro-level challenges (that would be YouTube being the Skype of the video space).
But back to Skype, while Henry Blodget’s addition to the blog landscape is a great thing, I think that to criticize eBay for pulling the trigger on its Big Hairy Audacious Goal is unfair. The deal, while rich, made sense. The idea that a seller and buyer would have a higher propensity to make a transaction if upon the click of a link they could fire up a chat or instant message was in theory very accurate. In practice, this boils down to the fact that wildly viral applications and explosive startups have - sit down M&A bankers - no business in an established, maturing business… and we’re talking eBay folks, not GE or Walt Disney.
Is it a coincidence then, that today Joost launched officially while eBay announces Zennstrom is leaving Skype?
Hmm… to some extent, yes. Sure, as one of the leading brains and visionaries of Web communications, Zennstrom is probably focusing more and more on Joost, even though he and partner in crime Frist have lured former Cisco executive Mike Volpi to run day to day operations. And, that’s a good thing, because while KaZaa and Skype are great growth stories, Joost will have to deliver on its promise for Zennstrom (and Frist) to add visionaries of content, commerce to that tagline.
In the broader picture, today a lot of folks are egging on MSFT, Yahoo! or Google to pay astronomical sums for an equally unproven asset - Facebook - that would make Skype’s price tag look paltry. If eBay is wrong to have pulled this trigger, then Facebook is not worth more than a $1.5B (10x revenues). Yet, an asset’s price is what the market will pay for it, and naturally, if Facebook went on auction (on eBay perhaps), I’d estimate that it would fetch quite a bit more than that.
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