eBay 2006 Annual Report Download - page 90

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The shares of our common stock issued in connection with the acquisition are subject to certain contractual
restrictions on resale. Additionally, the assumed options have been valued at $64.6 million and were included as part
of the purchase price. We accounted for the acquisition as a non-taxable purchase transaction, and accordingly, the
purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their
respective fair values at the acquisition date.
In addition to the initial consideration, the maximum amount potentially payable under the performance-based
earn-out is approximately A1.1 billion, or approximately $1.5 billion (based on a U.S. dollar to Euro exchange rate
of $1.32), and would be payable in cash or common stock, at our discretion. The earn-out payments are contingent
upon Skype achieving certain net revenue, gross profit margin-based and active user targets. Base earn-out
payments of up to an aggregate of approximately A877 million, or approximately $1.2 billion (based on a U.S. dollar
to Euro exchange rate of $1.32), weighted equally among the three targets, would be payable if the targets are
achieved over any four-quarter period commencing on January 1, 2006 through June 30, 2009. Additional bonus
earn-out payments of up to an aggregate of approximately A292 million, or approximately $386 million (based on a
U.S. dollar to Euro exchange rate of $1.32), weighted equally among the three targets, would be payable if Skype
exceeds the targets during calendar year 2008. Any contingent earn-out payments made would be accounted for as
additional purchase price and would increase goodwill. As of December 31, 2006, the targets had not been met and
accordingly, no payments had been made.
The intrinsic value of Skype’s unvested common stock options assumed in the acquisition totaled approx-
imately $55.2 million and was recorded, prior to the adoption of FAS 123(R), as unearned stock-based compen-
sation. The unearned stock-based compensation relating to the unvested options will be amortized on an accelerated
basis over the remaining vesting period of approximately three years, consistent with the graded vesting approach
under FASB Interpretation No. 28.
The estimated useful economic lives of the identifiable intangible assets acquired in the Skype acquisition are
five years for registered user technology and trade names, two years for existing technology, and one year for
network access agreements.
Supplemental information on an unaudited pro forma basis, as if the Skype acquisition were completed at the
beginning of the years 2004 and 2005, is as follows (in thousands, except per share amounts):
2004 2005
December 31,
(Unaudited)
Net revenues ............................................. $3,277,534 $4,594,954
Net income .............................................. $ 684,905 $ 944,057
Diluted income per share . ................................... $ 0.49 $ 0.66
The unaudited pro forma supplemental information is based on estimates and assumptions, which eBay
believes are reasonable. The average foreign exchange rates during years 2004 and 2005 were used in preparing the
supplemental information. The unaudited pro forma supplemental information prepared by management is not
necessarily indicative of the results of income in future periods or the results that actually would have been realized
had eBay and Skype been a combined company during the specified periods.
VeriSign’s Payment Gateway Business
On November 18, 2005, we acquired VeriSign’s payment gateway business for a purchase price of approx-
imately $373.8 million, consisting of $370.0 million in cash and $3.8 million in estimated acquisition-related
expenses. The payment gateway is a real-time, scalable Internet payment platform that allows merchants to
authorize, process and manage online payments. Additionally, we have signed a multi-year security technology
agreement with VeriSign, Inc. that calls for us to invest in the deployment of its technologies that enable and better
86
eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)