The dust has settled, the ink on the deal has dried, and one of the biggest sideshows in Silicon Valley this year appears to be over. The litigation between eBay, the buyers of Skype and its original founders has been dropped, and the deal, which values Skype at $2.7 billion, should close soon.
This means it’s time to start reflecting on the lessons of the whole skirmish. Here are three initial thoughts. (You’ll need an understanding of the primary characters and dynamics, so check our previous articles.) Please add your own thoughts on lessons learned in the comments.
When you buy a company, buy all of the underlying technology. Lots of folks are flatly condemning Meg Whitman, the former eBay chief executive (and current candidate for governor in California), for failing to buy a crucial piece of Skype’s infrastructure in 2005. The founders kept ownership of the so-called Global Index, a peer-to-peer system that was at the center of their lawsuits against eBay this year. Back in 2005, eBay was bidding for Skype primarily against Google, with Yahoo and the News Corporation in the wings. Buying the Global Index would have greatly complicated the purchase for eBay; it had other shareholders, and the Skype founders were already thinking about their next video venture, Joost, which would also use the technology.
It appears Ms. Whitman simply trusted the Skype founders to continue to make the Global Index available to Skype. That left eBay vulnerable.
2. Litigation can create valuable leverage in deals, even if its merits are questionable. We will never know whether the Skype founders would have won their lawsuits, and it is doubtful they could have halted the sale of Skype. EBay was prepared to claim that it was Niklas Zennstrom, one of Skype’s founders, who inextricably linked the Skype code and the Global Index while he worked for eBay. It is also not clear whether Michelangelo Volpi, the Index Ventures partner whose allegiances were at the heart of the lawsuits, really had any fiduciary obligations to Joost by early 2009, when the online video firm had so clearly failed. His employment contract was actually governed by state law in New York, which gives employees plenty of leeway to seek new employment.
Nevertheless, the lawsuits aired embarrassing details and put pressure on the dealmakers and on eBay, which needed to show the stock market it could close the sale as promised.
“One hates to see the kind of litigiousness the founders practiced here rewarded so handsomely,” said Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University. “Unfortunately, the time value of new technologies creates an opportunity for harassment and bullying simply by creating delay.”
3. Silicon Valley is a small place. Watch out for conflicts of interest (and claims of conflicts). The web of relationships in the Skype saga is dense. Danny Rimer was the underwriting analyst for Netscape, where Marc Andreessen began his career. Mr. Volpi and Charles Giancarlo, a partner and key figure in the deal at Silver Lake, worked together at Cisco. And Mr. Volpi was a board member of the old Skype before he became chief executive and chairman of Joost, and then the chief architect of the buyout of Skype. All this created a thicket of overlapping fiduciary responsibilities, which the Skype founders exploited in their lawsuits.
“Silicon Valley deals have always been messy, and this is one more episode that demonstrates that,” Mr. Hanson said.