Is The Skype Sale A Bad Sign For eBay-Heavy ETFs?

by on September 2, 2009 | ETFs Mentioned:

The sale of Skype that was rumored last week appears to be close to reality, as San Jose-based company eBay is poised to sell the company to a group of investors headed by private equity firm Silver Lake Partners. Under the terms of the deal, eBay will receive about $1.9 billion in cash and a note for another $125 million for a 65% interest in the company. The deal values Skype at about $2.75 billion. EBay’s total purchase price for the unit topped $3 billion in September 2005, and the company eventually wrote off most of the acquisition on its books after encountering difficulties integrating Skype.

Despite the fact that the purchase price is at the high end of analyst expectations, the reaction to the deal hasn’t been completely positive. Om Malik believes that the deal is a letdown for eBay shareholders who could have realized greater returns if the company had waited for a more opportune time to take Skype public. Citing a series of debacles in the management of the once promising tech startup, Malik laments that “it was as if someone opened the fuel tank on a rocket heading to the moon.”

Other investors were more pleased with the deal. Larry Dignan notes that managing to nearly breakeven on a deal “that was a bad idea from the beginning” is an acceptable outcome. Moreover, eBay is keeping a sizeable interest in Skype that will allow it to profit if the new management team is better able to monetize the technology.

There are a number of exchange-traded funds that have significant holdings in eBay, and investors in these funds are no doubt interested in what the Skype deal will mean for the company’s future. A quick look at ETFs with heavy allocations to EBAY:

  • Merrill Lynch Internet HOLDRS (HHH): The HOLDRS line of ETFs from Merrill Lynch tend to maintain relatively high allocations in individual securities, and HHH is no exception. EBay is the second largest individual holding at 23%, behind only (32%).


  • First Trust Dow Jones Internet Index Fund (FDN): FDN is designed to track the Dow Jones Internet Index, which is comprised of companies that generate at least 50% of their revenue from the internet. This ETF holds more than 40 individual equities, making it much more diversified than HHH. EBay accounts for about 6.5% of FDN’s holdings, its second largest allocation behind Google (9.8%).


  • PowerShares NASDAQ Internet Portfolio (PNQI): This ETF holds companies engaged in internet-related businesses and traded on the Nasdaq Exchange. EBay (9.2%) is the largest holding of PNQI, which has gained more than 50% in 2009.


Disclosure: No positions at time of writing.