Should Ebay sell Skype?

Over at FT.com, "Ebay considers sale of Skype subsidiary," says Richard Waters. 

From the article:

Ebay will consider selling off its Skype internet phone subsidiary at the end of this year if it fails to find ways to use the fast-growing service to support its core e-commerce business, according to the company's chief executive.

The comments from John Donahoe, who took over at the end of last month, are the most direct indication yet that Ebay is thinking of scrapping the ill-starred acquisition. It paid $3.1bn, but wrote down the value of the business by $1.4bn last year after concluding it would not match earlier hopes.

Tech geeks at slashdot.org are divided: 1) purchase of Skype didn't make sense (Skype = internet telephony service, Ebay = auction/ecommerce site, so where's the fit? 2) Ebay CEO's being short sighted, Skype makes perfect strategic sense. So why's he thinking of selling a growing business with a great future?

Ebay's blog (http://ebayinkblog.com/2008/04/18/john-donahoe-talks-to-ebay-ink/) on the other hand reports the following:

Before we jump into the original conversation, however, I wanted to make sure I addressed a timely and critical discussion that has been given more fuel by a Financial Times story, that ran on the heels of the earnings news this week, that I felt needed clarification directly from John. So, the first question and answer below is from earlier today. The rest is the transcript of my conversation with him on March 21. I plan on sitting down with Skype president, Josh Silverman, in the coming weeks to get his take on the future. For now, here is my conversation with John.

April 16, 2008

Q. I read in the Financial Times that we may sell Skype. That if the synergies are strong, we’ll keep it in our portfolio. If not, we’ll reassess it. Is this true?

We have no plans to sell Skype… and why would we? As I said in the story, it’s a great business with a great purpose — enabling the world’s conversations. With a new president, our plan for Skype is to focus on providing the best possible user experience and continuing the incredible growth momentum we’ve enjoyed with Skype for the past four years.
To be clear, I’ve fully supported big investments in Skype, including removing the earn-out, and bringing over some top talent like Josh. I think this business has tremendous potential that we’ve only started to tap. Josh and I are both excited about the prospects … our job now is to make sure we continue to build on Skype’s successes and grow its passionate community of users

Is it me or does it sound like major media damage control are in effect?

I'm of the opinion that Ebay would eventually sell Skype to focus on its core business. Skype's undervalued at the moment, the rational decision is to wait till the market's more appreciative of speculative ventures before selling. Skype offers great service but it needs a better strategic partner.

On Friday 18 April 2008, Ebay closed at USD$31.71 

Ebay's beta:  2.29

trailing P/E ratio: 101. 61

Link to eBay's google finance page: http://finance.google.com/finance?q=NASDAQ%3AEBAY

Cost of Equity for Emerging Markets

The following was sourced from Adrian Buckley's Multinational Finance, ch 24, pp 481 "International Investment: what discount rate?"

24.10 - Emerging Markets

[preceding this section was a discussion on the choice between an arbitrary extra risk premium when calculating discount rates for projects in EM countries and the International CAPM.]

Hooke(1998), for example, reckons that the cost of equity capital for emerging markets can be conceptualized as being equal to a comparable domestic return plus a foreign risk premium ranging between 5 percent and 15 percent.

Thus he recommends target returns for low-risk emerging markets, for example, Poland, the Czech Republic and Chile, at 18-20 per cent.

For medium-risk markets, such as Brazil, India, Indonesia and Mexico, Thailand and Turkey, he reports a recommended return of 20-25 per cent.

And for high risk countries, his cost of equity is between 25 and 30 per cent. Into this group, he categorizes China, Peru and Russia.

25 - 30 per cent Cost of Equity is a very large number to plug into your bog-standard Weighted Average Cost of Capital calculations. Unless you've got lots of debt in your capital structure, a 25 - 30% cost of equity, will discount your future cash flows by a lot. For investors, this means that Chinese and Russian stocks should trade at lower prices, given the risk they bear.

An easy way of estimating single-stock beta

I submitted an earlier post about calculating Singapore Press Holding's beta using daily and monthly returns. I came up with some ridiculous beta figure.

I made a lot of mistakes in calculating the beta of a single stock against a larger market index and I'd like to post some corrections..

1. To calculate single stock beta use Microsoft Excel's '=slope('%change of stock returns', '% change of market returns')

2. The idea is that Excel's slope function measures the gradient of a curve. Here, the Y-axis is % change of stock returns and X-axis is the % change of market returns.

3. Beta is then defined as the 'change in Stock Returns' for a 1% change in Market Returns.

4. Note that you should compare like against like. Therefore, if you collect daily prices and then determine daily returns, plot it against the market indexes daily returns as well.

Reverse Engineering Earnings Yield to Get Beta Values & The Case for SPH as a defensive stock holding.

Over at 8percentpa.blogspot.com, Xtam did a feature on the Price-Earnings ratio. The inverse of the PER gives you the earnings yield. The earnings yield is also the shareholder's Expected Return. Once you know the Expected Return you can then reverse engineer the figure to determine Beta - which is a measure of the co.s stock return in relation to the broader stock market.

Here's a case study:

Above you'll see the 1-year price chart for Singapore Press Holdings.

According to POEMS Dataline, Singapore Press Holding's Historial P/E ratio is 16.7

The inverse of the P/E ratio gives you 6%. Therefore, E(R) = 6%

Let's say the risk free rate of return in Singapore which is based on the Singapore Treasury note of 3.25% p.a. and that over the past 12 months (from 8 June 2007 to 8 June 2006) the red-hot singapore stock exchange has delivered an astounding annual return of 49%. How did I get that figure? I took 8 June 2007 Index level of 3881 and divided it by 8 June 2006 Index level of 2338.

risk free rate = 3.25%
Market return = 49%

The CAPM model is E(r) = Risk-free Return + Beta (Market Return - Risk-free Return). Solve for Beta.

6% = 3.25% + Beta (49% - 3.25%)

SPH beta = 0.06

This means that a 1% rise in the stock market would lead to a 0.06% rise in SPH stock return.

Beta can also be calculated in the following fashion:

Beta = Corelation Factor X Std Dev (Market) X Std Dev (Stock)

If the Beta of 0.06 is correct, then just by plugging in a few numbers, you can get a rough idea of how little SPH stock moves with STI in the long run.

The question is: How reliable is this estimate of Beta?

Here's a chart of Singapore Press Holdings against Straits Times Index. The blue line ending with code T39.SI refers to SPH and STI of course refers to the Index:



If you look at the left column, it clearly states that the 1-year return for the STI is in the ballpark of 50% zone while that of the SPH is in the low 4-6%. If this is true, then the beta estimate is reasonably accurate.

Voila Instant Beta! No need to sign up with expensive data supplier!

Here's my thoughts:
According to the chart, against a bullish economic backdrop it appears that SPH hasn't really performed. Could it be that SPH is the perfect defensive stock?

Let's look at what SPH has to offer. An almost complete monopoly on a captive market in News and Media. Co-owner of MediaCorp. Owns Paragon Shopping Centre. Chaired by Dr Tony Tan himself.

Hmm, I'd say at present market value, SPH is affordable and a useful hedge agst a falling market. Its always useful to know where all your Defensive stocks are and to buy into them to protect your portfolio's core value. If you've got money idling in the CPF OA account and you need something to accumulate earnings in, try SPH.

Thanks for reading!

Declaration: I, the author of this blog (and many other blogs) do hereby declare that I have holdings of SPH Call Warrants in the hopes of capitalizing on increased market interest in SPH over the coming weeks. SPH investor relations recently annouced that they will be re-valuing their prime Orchard Road property - Paragon Shopping Centre and will be releasing their earnings report sometime towards the end of July (me thinks.) The author has every intent to put his money where his mouth is by shifting some of his hard earned cash into the underlying stock as soon as his warrants trade makes him enuff to think defensively, SIR!!!!