1. bloomberg markets February 2010
118
ne night in 2007, employees at Skype Technologies SA
decided to send a message to their new corporate
parent, EBay Inc. They picked up the desk of Henry
Gomez, an EBay senior executive and Skype’s
president, and moved it to a far corner of the
company’s London office, says a former EBay senior
manager. The prank underlined how relations had deteriorated
between Niklas Zennstrom, Skype’s co-founder and chief
executive officer, and the online auction giant, which had
acquired the startup two years earlier. In September 2007, he
quit as CEO of the Internet phone company.
co-founders Niklas Zennstrom and
Janus Friis fought their way back into the Internet
company after selling it to EBay. Now, they must
win corporate clients on the way to an IPO.
sweet revenge
headed for the largest initial public
offering of a technology company since
Google Inc.’s 2004 IPO, says Paul Bard,
director of research at Greenwich,
Connecticut–based Renaissance Capital
LLC. Skype has soared in popularity
since it started in 2003 and boasts about
548 million users worldwide, more than
Facebook Inc., MySpace Inc. and Twitter
Inc. combined. Skype earned $165 mil-
lion in operating income in 2009, a 42
percent jump from 2008, Thomas Weisel
Partners LLC estimates. If Skype in-
creases its profits to $400 million by
2013, it could go public at a valuation of
$4 billion, says Bard, who specializes in
IPOs. “Investors would have a big appe-
tite for a profitable Internet IPO with its
growth and scale,” he says.
Zennstrom and Friis will have to get
along with some of the most powerful
personalities in technology to deliver a
hot IPO. Skype board member Marc
Andreessen, the computer scientist who
helped engineer the Web browser and
usher in the Internet boom in the late
By EDWARD ROBINSON and JOSEPH GALANTE Photographs by Neil Wilder/Corbis
Two years later, Zennstrom and Janus
Friis, his fellow Skype co-founder, have
elbowed their way back into the com-
pany. In September, they waged a legal
fight against EBay and a buyout group led
by private-equity firm Silver Lake that
had acquired control of Skype for $2 bil-
lion. The suits alleged that the consor-
tium and EBay had unlawfully used the
founders’ copyrighted software that
they’d licensed to Skype. The consor-
tium and EBay denied the allegation. In
November, Skype’s new owners cut
Zennstrom and Friis in for a 14 percent
stake and two board seats, and the duo
dropped their lawsuits.
“They were not going to let Skype get
away from them; that’s their baby,” says
Yvette Alberdingk Thijm, a former senior
content executive at Joost NV, an online
video company that was also co-founded
by Zennstrom, 44, and Friis, 33.
Now Skype, which lets users call each
other for free over the Internet, could be
™
o
3. bloomberg markets February 2010
120
1990s, is working on the company’s
growth strategy. A director at Hewlett-
Packard Co., EBay and Facebook,
Andreessen owns a Skype stake of about
5 percent through Menlo Park,
California–based venture-capital firm
Andreessen Horowitz LLC. Egon Dur-
ban, head of European investments at
Menlo Park–based Silver Lake, is also
playing a lead role at the Internet com-
pany. And EBay CEO John Donahoe will
have a say in Skype’s direction; his com-
pany retained a 30 percent stake.
Phillip Phan, a business professor at
Johns Hopkins Carey Business School in
Baltimore, foresees difficulties in the
Google-caliber business. “What’s great
about the alignment of interests is that
it doesn’t require everyone to love each
other; it’s not grade school,” says
Andreessen, who fires off comments
with the speed of a machine gun. “If
Niklas and Janus have six ideas on how
the company can increase exponentially
from where it’s at, I want to hear those.”
Thenewowners’bigideaistoexpand
Skypeintothe$203billionmarketforcor-
poratetelecommunications.Thecom-
pany,whichhasabout700employees,will
formanewdivisionwithasalesforce,
productdevelopmentmanagersandcus-
tomer-supportteamstoofferbusinessesa
suiteofservicesandsoftware.“We’re
chasingabigopportunity,”saysSkype
CEOJoshSilverman,40,formerheadof
EBay’sShopping.comunit.
TheInternetcompanywillhaveto
gainthetrustofcorporations,whichto-
daylargelyrelyondedicatedfiber-optic
networksfortheircommunications.
Businessesmaybeunwillingtoswitch to
aphoneservicebuiltontheless-secure
Internet,saysVanessaAlvarez,ananalyst
atFrost&SullivaninBoston.“Enterprises
aren’tcompletelycomfortablebringing
inaconsumerInternetcompanythat’s
mostlyusedforchitchat,”Alvarezsays.
Skype has also lobbied the Federal
Communications Commission as part of
its strategy to become available on more
mobile telephones. In September, FCC
Chairman Julius Genachowski proposed
new rules to bar telecom carriers from
blocking Internet traffic on their wireless
networks, a problem that’s hindered
Skype. The commission may vote on the
initiative this year.
ASkypeIPOwouldmarkacoming-of-
ageforWeb-basedsocialandprofessional
networkingcompaniessuchasFacebook
andLinkedInCorp.Theseso-calledWeb
2.0startupsareenlargingtheironline
communitieseachmonthwithmillions
ofnewmembers,whothenrecruittheir
friends,familymembersandcolleagues
tojoin.Skypemaytakemarketsharefrom
AT&TInc.andVerizonCommunications
Inc.muchlikeGoogleandCraigslistInc.
snatchedadvertisingfromnewspapers.
“What’svaluableaboutSkypeishaving
robyntwomey
Chat Master
548
350
125
58
Skype’s Internet phone service is adding more
than 300,000 users a day.
USERS, IN MILLIONS
Figures are as of Dec. 15, except for Skype, which is an estimate for the number of users
expected as of the end of 2009. Source: Company reports
™
Andreessen, who
helped create the
Web browser,
works on Skype’s
growth strategy.
boardroom be-
tween Zennstrom
and Friis and their
fellow stakehold-
ers. “It’s obvious
that the founders have an emotional in-
terest in the company,” says Phan, who
teaches corporate governance. “I suspect
you will see an ongoing battle in the ex-
ecutive suite between the founders and
the rest of the partners.”
Zennstrom and Friis refute this asser-
tion. “That skepticism is entirely mis-
placed,” their spokesman Tom Rayner
wrote in an e-mail. “Niklas and Janus
have a huge and genuine respect for their
new partners, with
whom they are very
much looking forward
to working.”
Andreessen, 38, says
he expects the found-
ers to bring zeal and
innovation to the com-
pany they created, not
acrimony. Seated in a
sunlit conference room
of his venture capital
firm, with a view of the
redwood-covered
Santa Cruz Mountains,
he says all of Skype’s
owners share the same
goal of making it a
4. 121
February 2010 bloomberg markets
halfabillionconnectedusers,”saysBill
Gossman,anexecutive-in-residenceat
Mohr Davidow VenturesinMenloPark.
“Ithasaplatform for deliveringallthese
other services,andthat’samassivethreat
totraditionalphonecompanies.”
Skypemakesmoneybychargingabout
2centsaminuteforcallstononservice
users.Today,seven-year-oldSkypeisthe
No.1providerofcross-bordercalls,with
12percentofthemarket,estimates
Washington-basedTeleGeography
ResearchGroup.Thecompany
alsocollectsfeesforvoice-mail,
text-messagingandotherservices.
Zennstrom and Friis set out to shake
up traditional industries soon after they
met in 1997. Zennstrom, then a manager
at Swedish phone company Tele2 AB,
hired Friis to work on the customer ser-
vice desk. Zennstrom, a married Swede
with dual degrees in engineering physics
and business administration from Upp-
sala University outside Stockholm, is an-
alytical and disciplined and shuns small
talk in meetings, former colleagues say.
One former colleague likens Zennstrom
to Mr. Spock, the cerebral Star Trek char-
acter who prizes logic above all else.
Friis, an unmarried Danish high school
dropout, is a restless man who con-
stantly taps out text messages on his
smartphone during business meetings,
even when addressing others, the former
colleagues say.
In 1999, the pair collaborated with en-
gineers in Tallinn, Estonia, to write the
software for Kazaa, a technology that
helped upend the music industry. The
peer-to-peer MP3 file-sharing program
akin to Napster allowed users to copy
and distribute songs without paying for
them. The music industry and other en-
tertainment groups sued Kazaa for copy-
right infringement; Zennstrom and Friis
denied wrongdoing. In 2006, the duo,
which no longer owned Kazaa, took part
in a settlement of the litigation.
By then, Zennstrom and Friis had al-
ready created Skype using the same peer-
to-peer technology that powered Kazaa.
In September 2005, Skype had 54 million
users, and Google and Yahoo! Inc. were
negotiating to buy it.
noahberger/ap-wideworld
Not for long. In
late 2005, Whit-
man and her
lieutenants flew
from Califor-
nia to Esto-
nia, the site
of Skype’s
engineering
staff, for their
first in-depth
review of the
company with
Zennstrom and
Friis. The two men
didn’t show; they’d over-
slept in London and missed their
flight, says a former senior EBay execu-
tive familiar with the meeting. After trav-
eling across 10 time zones, Whitman and
her team had to wait hours in Estonia for
the founders.
As startup entrepreneurs, Zennstrom,
Friis and their engineers seemed to chafe
under EBay’s bureaucratic rules, the ex-
ecutive says. They were obliged to pro-
duce a stream of budgets, employee
reviews and weekly metrics reports.
“They didn’t say it to us directly, but they
kind of looked at us and said, ‘This is stu-
pid,’” the executive says.
EBay grew frustrated at its inability to
impose discipline on the Skype camp.
EBay wanted the founders to embrace a
long-term growth plan that generated
profits. Instead, Skype’s engineers pro-
duced applications with limited interest
to consumers, such as three-dimensional
chess, as they chased the short-term
growth targets set by the acquisition’s
$1.5 billion incentive agreement, the for-
mer executives say. Rayner, the founders’
spokesman, declined to comment on
their tenure at EBay.
WhenZennstromquitasSkype’sCEO
inSeptember2007,EBaypaidthefound-
ersandotherearlySkypeinvestors$530
millionfromthe2005incentiveagree-
ment.EBayalsowrotedowntheunit’s
valueby$900million.“TheSkypedeal
didn’tmakeanysense,”saysGeorge
Shipp,amoneymanageratBB&TAsset
ManagementInc.basedinRichmond,Vir-
ginia,whichholds1.4millionEBayshares.
Former EBay CEO
Whitman bought
Skype in 2005 for
$2.6 billion.
‘What’sgreat
aboutthe
alignment of
interestsis that
itdoesn’trequire
everyoneto love
eachother; it’s
notgradeschool,’
Andreessensays.
Meg Whitman, a Harvard Business
School graduate who had been CEO of
EBay from its infancy in 1998, joined the
chase for Skype. Whitman, 53, boosted
EBay’s sales sevenfold to $3.3 billion in
2004 from four years earlier. As revenue
and profit growth slowed in 2005, she
wagered Skype could spur sales by letting
buyers and sellers on its auction site talk
for free with a mouse click.
hitman outbid Google and
Yahoo and agreed in September
2005 to pay $2.6 billion for a
money-losing startup. The CEO
sweetened the deal with an additional
$1.5 billion in incentives if Skype reached
growth targets between 2006 and 2009.
“With the leader in Internet voice com-
munications, we will create an extraordi-
narily powerful environment for
business on the Net,” Whitman said in a
statement in September 2005.
Whitman didn’t obtain total control
of Skype. Zennstrom and Friis kept
ownership of the underlying peer-to-
peer software in a company called Joltid
Ltd., which licensed the technology to
Skype. And Zennstrom intended to con-
tinue running Skype as an independent
enterprise. “We didn’t look at this as
selling the company,” Zennstrom said at
a technology conference in Athens in
October 2005, according to Bloomberg
News. “We were looking for a partner, a
company that
would help us
grow. We hit it off
well with EBay.”
w
5. bloomberg markets February 2010
122
two agreed to invest $83 million, trans-
fer ownership of their software from
Joltid to Skype and drop their suits in
exchange for a stake in the company
worth $378 million. EBay reduced its
equity position to 30 percent, and the
buyout group decreased its stake to 56
percent from 65 percent. “They created
a big legal kerfuffle to edge themselves
into the deal,” Mohr Davidow’s Goss-
man says.
ZennstromandFriisdisruptedthemu-
sicindustrywithKazaaandthenearneda
windfallbysellingSkypetoEBay.Now,
theymustprovethatthey’reentrepre-
neurscapableofwinningcorporate
clientsonthewaytoanIPO—notjust
techrebelswhoplaybytheirownrules.≤
Edward Robinson is a senior writer at
Bloomberg News in San Francisco.
edrobinson@bloomberg.net Joseph Galante
covers e-commerce in San Francisco.
jgalante3@bloomberg.net
harryborden/corbis
You can use the Bloomberg M&A Analysis (MA) function to
display details of the 2009 buyout of Skype led by Silver Lake.
Type MA <Go> 1 <Go>, tab in to the Company Name field,
enter SKYPE and press <Go>. Click on Skype Ltd. in the list
of companies to display deals involving the Internet firm. For
details of the buyout, click on the divestiture announced on
Sept. 1, 2009, as shown below.
For information on the loan facility used to finance the
deal, first type SKYTEC L <Corp> <Go>. Click on the facility,
which is displayed in white, and type 1 <Go> 1 <Go> for details
on the $700 million term loan. To use the Debt Distribution
(DDIS) function to chart the maturity of
Skype’s loans, click on the Functions but-
ton on the red tool bar and select DDIS.
You can use the Equity Screening
(EQS) function to find other companies
that offer Internet telephone services.
First, type EQS <Go>. If the green button
on the tool bar says Advanced Screening
Mode, click on it so that it changes to
Screen Builder. In the Universe Criteria
section of the screen, click on Product
Segments. Tab in to the Search field,
enter VOICE OVER INTERNET and press
<Go>. Click on Voice Over Internet Protocol (IP) Services un-
der Search Results so that it appears in the Included Product
Segments section of the screen. Click on the first arrow be-
low and to the right of Select Measure to Analyze and select
Revenue. Click on the next arrow to the right and select Lat-
est Year. Then click on the Update button. In the pop-up box
that appears, select > Greater Than. To screen for companies
that derived more than $10 million of their revenue from
VOIP services, enter $10 in the field that appears. Press <Go>
and click on the Results button for a list of those companies.
JON ASMUNDSSON
CallingUpSkype
Whitman stepped down as CEO of
EBay in March 2008 and is running for
the Republican Party’s nomination in the
2010 California gubernatorial race. Sarah
Pompei, Whitman’s spokeswoman,
defended the Skype deal. “Meg strongly
believes this is and will continue to be a
beneficial acquisition for EBay,” Pompei
wrote in an e-mail.
n early 2009, Zennstrom and Friis
saw their chance to regain some
control of Skype as Donahoe,
Whitman’s successor, moved to
spin it off. They joined with Eleva-
tion Partners LP, a Menlo Park–based
private-equity firm, to bid for it. On Sept.
1, EBay instead agreed to sell 65 percent
of Skype to the Silver Lake–Andreessen
group, which includes the Canada Pen-
sion Plan Investment Board, in a deal
that valued the company at $2.7 billion.
In response, Joltid, Zennstrom and
Friis’s holding company, sued in two
courts in September. The suits claimed
To write a letter to the editor, send an e-mail
to bloombergmag@bloomberg.net or type
MAG <Go>.
that EBay and the
consortium mis-
used the peer-to-
peer software in
making their deal and asked the courts
to block them from proceeding. Eager to
eliminate the legal distraction, the buy-
out group offered to bring Zennstrom
and Friis into the deal. On Nov. 5, the
i Skype CEO
Silverman is
chasing corporate
customers.
