Question: On October 14, 2005, eBay acquired Skype,
On October 14, 2005, eBay acquired Skype, paying $1.3 billion in cash plus $1.3 billion in stock. However, approximately 60% of the Skype shareholders opted for a lower cash amount and stock up front for the possibility of receiving a potential performance-based payment of up to another $1.3 billion in 2008 through 2009. In the following schedule, summary pro forma income statement data are prepared showing the performance of eBay as if the Skype acquisition were completed prior to the beginning of 2004. Summary data from the actual reported income statements for the two years are also presented in the following schedule.
Required:
1. Using these numbers, evaluate the wisdom of the acquisition of Skype by eBay. Discuss some of the reasons that ratio analyses alone may not tell the entire story.
2. Did the shareholders of Skype who opted for the lower cash amount and contingency payment make a wiser or poorer choice relative to the 40% who made the alternative choice? Why? What other factors might affect your answer?
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Income Statement Pro Forma (assumed combined) 2004 2005 Net Revenue pro forma Net Income pro forma $3,277,534 $4,594,954 684,905 944,057 As Reported by elBay 2004 2005 Net Revenue-actual 3,271,309 4,552,401 Net Income-actusal 778,223 1,082,043
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