This week, activist investor Carl Icahn wrote two open letters to eBay’s shareholders shredding eBay’s board of directors and, in particular, Marc Andreessen. In the first, he questioned Andreessen’s loyalty to the company, bringing up two situations where Andreessen “purchased large stakes” in former eBay companies, “reaping significant personal riches.”
There is an obvious appearance of a conflict of interest here: As a board member, Andreessen is supposed to act only in the interests of eBay and its investors. Yet as a venture capitalist, his company has made money selling eBay’s assets privately.
Icahn highlights in particular a deal involving Skype. eBay owned Skype for several years before selling off the majority of its shares to an investor group led by an equity firm called Silver Lake Partners. Less than two years later, Microsoft bought Skype. Andreessen was in on the deal, as part of the Silver Lake group.
In his second scathing letter, Icahn wrote that Andreessen was ” netting a $US4 billion gain for himself and Silver Lake” in that transaction — money that should have gone to eBay stockholders. He insinuates that Andreessen knew the selling potential of Skype, and should have encouraged eBay CEO John Donahoe to spin off Skype in an IPO or find a better offer than Silver Lake’s.
People mocked eBay for buying Skype.
How did the whole deal go down? Here are the facts:
In 2005, eBay bought Skype for approximately $US2.5 billion. At the time, people mocked eBay, because Skype seemed like nothing more than a money-burner. Several years later, eBay decided that the messaging and communication company didn’t jibe with its commerce and payment goals (though it did generate $US551 million in revenue in 2008), so it decided to try to sell off the company.
eBay announced in 2009 that Skype would stage an IPO in the next year. Analysts at the time said that Skype could fetch $US2 billion, though Donahoe said that that valuation was low. As it prepared for the IPO, the company also said that it would consider other bids for Skype if they came along. And they did.
Today, eBay describes the response as a “competitive process with multiple bidders including several financial and strategic buyers.” (In his most recent letter to eBay shareholders, Icahn writes that he sent a letter to eBay demanding to inspect all books and records regarding the selling process, because he doesn’t believe that it did explore all possible options.)
In September 2009, eBay sold about 65% of Skype to a group of investors led by Silver Lake in a deal worth $US2.75 billion. At the time, Donahoe said that he was excited to sell Skype at this “great valuation,” while retaining an equity stake. eBay recieved about $US1.9 billion in cash, plus a note promising a payment of $US125 million in the future. Marc Andreessen’s venture capital firm — Andreessen Horowitz — was part of that group, buying about a 3% stake in the company (Andreessen had co-founded the firm earlier that year). At the time, The Wall Street Journal reported that Silver Lake asked Andreessen Horowitz to join the fund after it had already approached eBay.
Suddenly, Skype is worth $US8.5 billion.
Less than two years later, in May 2011, Microsoft bought Skype for $US8.5 billion in cash. That price is way beyond the $US2.75 valuation that eBay saw when it was selling its stake in the company, but Skype had also grown in those 18 months (it was generating revenue of $US860 million in 2010, up from $US551 million when eBay sold its stock, and in 2011 it was just developing new ways to make money). Facebook, Google and Cisco all also reportedly showed interest in buying the company.
Andreessen was not allowed to be part of any decision making process (he was “recused,” according to eBay’s Board Governance Guidelines, after Andreessen Horowitz bought in, in 2009). But he said in an interview with that Daily Beast after the sale that his firm knew that for “Microsoft and a number of other companies, Skype would be an obvious thing to buy.” Was Microsoft one of the “strategic buyers” that originally approached eBay when it was looking for buyers in 2009 ? If not, should Andreessen, as an eBay board member, have pushed CEO Donahoe to consider Microsoft?
The Silver Lake led investor group earned about $US4 billion on the deal, and Andreessen Horowitz recieved 3 per cent of that. However, this was the first big exit for Andreessen’s new VC firm and it helped him cement his status as one of the most powerful dealmakers in Silicon Valley.
eBay itself made money off the deal, too. Because of its remaining stake in the company, it earned $US1.4 billion on the acquisition. If you add that money to the $US1.9 billion that eBay originally recieved in 2009 from selling off part of Skype, the company made $US3.3 billion total, or about $US1.8 billion more than it bought Skype for. Shareholders didn’t literally lose money, in other words.
Andreessen definitely benefited, but …
So, is Icahn right about Andreessen — did eBay shareholders miss out on larger gains that, in hindsight, seemed obviously available?
Well, Andreessen certainly didn’t “purchase a large stake” in Skype. Did he “reap significant personal wealth” from the deal? Yes, three per cent of $US4 billion is significant, though that money isn’t exactly his personal wealth.
Andreessen definitely benefited from the way the deal played out — in reputation as well as cash-wise — but to insinuate that he should have convinced Donahoe not to sell its stake to Silver Lake — when the offered valuation was greater than what analysts were predicting for an IPO — or that he could have predicted what Skype would sell for almost two years later in a different ecosystem after significant growth, is a stretch.
Disclosure: Marc Andreessen is an investor in Business Insider.