The Canada Pension Plan Investment Board is heading further out on the risk curve in search of higher returns, putting $300-million (U.S.) into the $1.9-billion purchase of a majority stake in Internet phone service Skype by a group of private equity funds.
The pension fund is teaming up with Silver Lake Management LLC, a firm that specializes in technology buyouts, and two U.S. venture capital firms to purchase a 65-per-cent stake in Skype from eBay Inc. EBAY-Q , the online auction company. CPPIB will own 15 per cent of the business.
CPPIB has become a big player in the buyout world in recent years, but has tended to make direct purchases of companies such as utilities, rather those in the high-growth category. To see the $117-billion national pension fund show up with venture capitalists buying a big, fast-growing and potentially risky technology play is a surprise, but it's a natural evolution as the fund rounds out its portfolio, said Mark Wiseman, the CPPIB executive in charge of buyouts.
“It's all about doing transactions that we believe are going to reward us appropriately for the risk we are taking,” he said.
“Certainly, buying an Internet-based company is very different from buying a water company, but they all have their place.”
Pension funds such as CPPIB don't necessarily take more risk in their overall portfolio with a purchase like Skype, said Janet Rabovsky, a Toronto-based investment practice director for Watson Wyatt, which consults for the pension sector.
They can take less risk elsewhere in the portfolio, keeping what's known as the “risk budget” balanced.
“You don't have to change your overall risk budget, you just choose to spend it differently,” she said.
CPPIB ended up in the Skype deal after Silver Lake reached out, looking for financial backing. It's likely that the board will find itself in more surprising deals in the coming months because of its ability to provide cash, which is valuable at a time when loans from banks are still scarce.
“We have the ability to write a $300-million cheque into a transaction, which makes us the first call, in some cases, the only call,” Mr. Wiseman said.
Silver Lake and CPPIB have a relationship because the Canadian money manager invested in two of Silver Lake's private equity funds. Silver Lake and CPPIB have also reportedly looked at a joint bid for Norway's Tandberg, the world's biggest maker of video conferencing equipment.
In Skype, the buyers are getting what Mr. Wiseman called a “disruptive technology” that accounts for about 8 per cent of all international long-distance traffic. But even though it's best known for allowing people to call for free using their computers, Skype is no money-losing tech dream.
Skype makes money by convincing users who have joined for the free stuff to upgrade to paid services such as online numbers and voice mail. JPMorgan analyst Imran Khan has estimated that Skype will bring in earnings before interest, taxes, depreciation and amortization (EBITDA) of about $156-million in 2010. It generated $551-million of revenue in 2008 and eBay had projected revenue of more than $1-billion in 2011.
“This is not your typical 1999-2000 dot-com deal,” Mr. Wiseman said. “This is an established brand with somewhere close to half a billion users globally. It's one of the foremost names on the Internet and the foremost name in online communications, with real cash flows and very real earnings.”
Skype, however, never made sense for eBay, whose primary business is an Internet auction service. When it purchased Skype in 2005, eBay argued that it would let auction participants chat more easily. That rang hollow then, and time proved that eBay had made a mistake. After writing down the value of Skype, eBay put it up for sale.
“We think that with this investor group, focused solely on this business, we are going to be able to really supercharge the growth in this business over the next several years,” Mr. Wiseman said. In addition to CPPIB and Silver Lake, the group includes Andreessen Horowitz, a venture firm launched by Netscape Communications founder Marc Andressen, and Index Ventures, a European venture capital firm that invests in technology and life sciences companies.
Analysts expect that the buyers may expand beyond the consumer market.
“They've really been making an initiative to move into the business space,” said Vanessa Alvarez, an analyst at Frost & Sullivan Inc. in Boston. “That's the next step for this market.”
Mr. Wiseman would say only that the group has “very detailed value-creation plans” because he doesn't want to give away secrets before the acquisition closes.
“I don't think we even know what it's going to do,” he said. “I don't think Alexander Graham Bell even knew what the telephone was going to do when he invented it. But we do know it's absolutely going to change the way people communicate and for people that own that technology it's going to be a good thing.”
With a file from Bloomberg News
