eBay must be ruing the day that it signed the M&A
deal to buy Skype for $2.6b, in addition to an additional
$530m as part of the earn-out provisions. Its original vision of
incorporating Skype functionality into its auctions never happened. Despite
that, Skype has proven itself to be quite interesting as a standalone entity,
with some value potentially to be recouped via a spin-out IPO. However based on
an eBay 10-Q form filed with the SEC on 7/30/2009, this
is now at risk over a dispute over a license.
It seems that some of the core functionality within Skype
is based on peer-to-peer software licensed from Joltid, a company also controlled
by the founders of Skype, Niklas Zennstrom and Janus Friis. So if I get this
right, Joltid entered into a non-arm’s length license with Skype
(pre-acquisition), a company that Zennstrom and Friis also controlled. When
eBay acquired Skype, it would have known that while it was “buying” Skype, it wasn’t
buying Skype source code, it was licensing it from Joltid. Given the amount of
money involved in the deal, and the fact that the principals were the same, insisting
on a perpetual, fully paid up license, in some Field of Use (voice, IM and
video applications) with rights to derivatives would seem to have been very
do-able.
Instead, it appears that Zennstrom and Friis pocketed a
boatload of eBay cash, and retained control of Skype’s destiny via a licensing
agreement. Now with the M&A (and liquidity) at risk, eBay is now over a
barrel. Negotiate and pay for that fully paid up license, re-write everything,
or write it all off as the worst deal of the century. OK, maybe that’s
overstating it, the Time Warner-AOL deal sucked pretty badly too.
I’ve been involved with transactions that have nearly
fallen apart at the eleventh hour because of legacy tech transfer licenses. “What do you mean we’ll have to pay 4%
royalties ad infinitum? We’re buying the company!” When it gets to this
stage and a deal’s at risk, the original licensor has all of the leverage, and
will often be “bought off”, at the expense of the shareholders, to make the
issue go away so the deal can get done.
Having negotiated multiple technology transfer and M&A
deals, I have learned that it is imperative to construct the tech transfer deal
with M&A in mind. Exclusivity in a well-defined Field, rights to Derivative
Works, Non-Assertion of IP rights, a built-in cap or royalty buy-out to convert
to a license in perpetuity, are all essential. Of course, in a non-arm’s length
licensing agreement, like that between Joltid and Skype, the license terms
would have been very different, but in this case it is incumbent on the
acquirer to recognise this and force the issue while they have the leverage.
In hindsight, many would agree, this acquisition missed
the mark strategically, resulting in a
$1.43b writedown. But it’s hard to fault big, bold plays with the potential
to break new ground. I have a deep admiration for those involved in transactions
like that. But a key takeaway is the tactical execution by eBay’s M&A team
appears to have missed the inherent conflicts of interest and let slide the
licensing agreement with Joltid. Now, with no leverage, it’s biting them hard.
Caveat emptor!
That’s my .02!
Martin Suter
(martin.suter at iplicensing.net)
