What You Need to Know Before Investing in eBay’s Stock

Karen works as an attorney in San Francisco.  One of her favorite pastimes is to shop.  Shop in the big stores off of Union Square, visit the boutiques scattered throughout the city, and most importantly, shopping online.  Her passion is, like most women, clothes and shoes. Her love of websites like Amazon.com and Craigslist, is only surpassed by her addiction to eBay.

eBay, is the competitive crack that many middle-aged Americans are seeking in life.  The competitive nature of bidding for an item you really want is addicting.  It gets the heart pumping and the euphoria you feel when you win an auction is unsurpassed.  I know, I use it too.

I like to think of E-bay as the world’s largest garage sale.  I remember as a kid browsing garage sales on Sunday mornings with my grandmother and great aunt, as they looked for special deals.  I was always amazed at how effective they were at haggling for items . . . always making lowball offers and more times then not, they got the item they wanted at a very good price.

In the corporate world, haggling and bidding for an item, like another company can be fraught with danger and very expensive.  This week, as an example, our favorite online retailer eBay announced its plans to write off more than $ 1.4 billion dollars.

Poof . . . gone like that.  $ 1.4 billion dollars disappeared.

It’s amazing, but this massive write-off is the result of a bad shopping trip.  But instead of buying clothes, the management team at eBay bought a company.

Back 2 years ago, in October of 2005, eBay plunked down approximately $ 2.6 billion dollars for a little company called Skype.  This telephone over the internet company was supposed to take eBay in new directions. It was supposed to change the business.  Skype only had revenue of about $ 10 million a year, and if I remember right, it was far from profitable.  The potential is great is what we were told.

This week, management essentially admitted that it made a mistake; they removed the founder of Skype, and have started the process of taking a financial charge to the business.  My observations are these: winning a bidding war for a company, while fun on Ebay, can have a very negative effect on a business, and while acquisitions can be a positive thing, if it strays too far from a company’s core competency it will undoubtedly prove disastrous.