By Liana B. Baker
NEW YORK, Sept 3 (Reuters) - Skype, the Internet calling company, could have trouble getting top dollar in its initial public offering thanks to Google Inc.
Skype is high profile and some capital markets experts had hoped a successful offering would jump-start the IPO market for technology companies. Companies such as Hulu and Yelp are seen as potential IPO candidates when the market improves.
But hopes Skype would lead a wave of tech IPOs are fading after Google announced a new feature on Aug. 25 allowing users to make calls through their Gmail accounts, driving users to dial a million calls in 24 hours.
With the added competition of Google, Josef Schuster, founder of IPO research house IPOX, said he will probably lower his bid for Skype shares for his Direxion Long/Short Global IPO fund.
'Google is obviously going to cut into Skype's main business,' Schuster said.
Google is the biggest threat to Skype's position as the leader in Internet calling. While other companies have offered similar services before, none has had a subscriber base like Google's and the convenience of being built into a browser such as Gmail, says Stephan Beckert, a research analyst at TeleGeography.
Even before Google's announcement, some analysts were concerned about Skype's profitability. Only 8.1 million, or 6.5 percent of Skype's 124 million average monthly users, were paying customers in the second quarter of 2010, according to a regulatory filing.
The company's operations have not always been profitable, although in the first six months of 2010, Skype posted net income of $13.1 million.
'The firm still struggles to generate a strong enough operating profit to reward investors for the risk of their capital,' said Mike Gaiden, an analyst at Morningstar.
Gmail users can make free calls from their computers to telephones in the United States and Canada until the end of the year, while international calls start at 2 cents a minute.
Skype charges users to make calls from computer to phones, starting at about 2 cents a minute to call in the United States, then the rates vary from country to country. Calls between computers and other devices using Skype are free.
Investors might also have been scared off by Vonage Holdings Corp, the last major Internet telephony company to go public. The IPO in May 2006 was set at $17 per share, but the shares plummeted soon after its debut. Vonage shares were trading at $2.24 on Friday.
CLOSE WATCH ON SKYPE
Skype filed for a $100 million IPO on Aug. 9, but it is likely the company will raise more. A group of investors bought Skype from eBay Inc in November 2009 for $1.9 billion in cash and a $125 million note.
How much the company will be worth in an IPO is hard to say. IPOdesktop.com's Francis Gaskins puts Skype's valuation between $2 billion and $2.5 billion, assuming it traded at about 10 times the value of its earnings before interest, taxes, depreciation and amortization, a measure of cash flow.
He said a consumer company with a less-well known brand might trade at closer to 6 to 8 times EBITDA, but Gaskins believes Skype may be able to get a premium valuation.
There are some market tail-winds that could help Skype. Tech IPOs have outperformed their non-tech counterparts, rising 9.9 percent this year, compared with the overall IPO market's decline of 4.6 percent, according to Thomson Reuters data.
MakeMyTrip Ltd, an Indian Internet travel agency made a strong debut on the Nasdaq in August and its shares were trading at $32.90 on Friday, more than double the offering price.
But MakeMyTrip is fairly low profile, analysts said. For big tech companies to consider coming to market, they will want to see a big name do well.
'A success story with Skype will put the spotlight back on the tech sector,' Gaskins said.
Many analysts are skeptical about whether Skype could get a premium valuation, or set a tone positive enough for other companies to want to go public.
'I don't think Skype fits that bill in terms of a marquee company that would set the IPO market alight,' Gaiden added.
(Reporting by Liana B. Baker; editing by Andre Grenon) Keywords: MARKETS/STOCKS IPOS (liana.baker@thomsonreuters.com +1 646 223 6179) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, Sept 3 (Reuters) - Skype, the Internet calling company, could have trouble getting top dollar in its initial public offering thanks to Google Inc.
Skype is high profile and some capital markets experts had hoped a successful offering would jump-start the IPO market for technology companies. Companies such as Hulu and Yelp are seen as potential IPO candidates when the market improves.
But hopes Skype would lead a wave of tech IPOs are fading after Google announced a new feature on Aug. 25 allowing users to make calls through their Gmail accounts, driving users to dial a million calls in 24 hours.
With the added competition of Google, Josef Schuster, founder of IPO research house IPOX, said he will probably lower his bid for Skype shares for his Direxion Long/Short Global IPO fund.
'Google is obviously going to cut into Skype's main business,' Schuster said.
Google is the biggest threat to Skype's position as the leader in Internet calling. While other companies have offered similar services before, none has had a subscriber base like Google's and the convenience of being built into a browser such as Gmail, says Stephan Beckert, a research analyst at TeleGeography.
Even before Google's announcement, some analysts were concerned about Skype's profitability. Only 8.1 million, or 6.5 percent of Skype's 124 million average monthly users, were paying customers in the second quarter of 2010, according to a regulatory filing.
The company's operations have not always been profitable, although in the first six months of 2010, Skype posted net income of $13.1 million.
'The firm still struggles to generate a strong enough operating profit to reward investors for the risk of their capital,' said Mike Gaiden, an analyst at Morningstar.
Gmail users can make free calls from their computers to telephones in the United States and Canada until the end of the year, while international calls start at 2 cents a minute.
Skype charges users to make calls from computer to phones, starting at about 2 cents a minute to call in the United States, then the rates vary from country to country. Calls between computers and other devices using Skype are free.
Investors might also have been scared off by Vonage Holdings Corp, the last major Internet telephony company to go public. The IPO in May 2006 was set at $17 per share, but the shares plummeted soon after its debut. Vonage shares were trading at $2.24 on Friday.
CLOSE WATCH ON SKYPE
Skype filed for a $100 million IPO on Aug. 9, but it is likely the company will raise more. A group of investors bought Skype from eBay Inc in November 2009 for $1.9 billion in cash and a $125 million note.
How much the company will be worth in an IPO is hard to say. IPOdesktop.com's Francis Gaskins puts Skype's valuation between $2 billion and $2.5 billion, assuming it traded at about 10 times the value of its earnings before interest, taxes, depreciation and amortization, a measure of cash flow.
He said a consumer company with a less-well known brand might trade at closer to 6 to 8 times EBITDA, but Gaskins believes Skype may be able to get a premium valuation.
There are some market tail-winds that could help Skype. Tech IPOs have outperformed their non-tech counterparts, rising 9.9 percent this year, compared with the overall IPO market's decline of 4.6 percent, according to Thomson Reuters data.
MakeMyTrip Ltd, an Indian Internet travel agency made a strong debut on the Nasdaq in August and its shares were trading at $32.90 on Friday, more than double the offering price.
But MakeMyTrip is fairly low profile, analysts said. For big tech companies to consider coming to market, they will want to see a big name do well.
'A success story with Skype will put the spotlight back on the tech sector,' Gaskins said.
Many analysts are skeptical about whether Skype could get a premium valuation, or set a tone positive enough for other companies to want to go public.
'I don't think Skype fits that bill in terms of a marquee company that would set the IPO market alight,' Gaiden added.
(Reporting by Liana B. Baker; editing by Andre Grenon) Keywords: MARKETS/STOCKS IPOS (liana.baker@thomsonreuters.com +1 646 223 6179) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.