Sept. 12 (Bloomberg) -- EBay Inc., the largest online auctioneer, agreed to buy Skype Technologies SA for $2.6 billion to enter the fast-growing market for Internet phone service.

EBay is paying more than three times its earnings last year for the unprofitable, two-year-old Luxembourg-based company with 53 million registered users of its Internet-calling software. The price of EBay's largest acquisition to date may increase by as much as $1.5 billion based on the performance of closely held Skype, EBay said.

The company plans to offer the free service on its auction site to improve communication and quicken transactions. Skype will also compete with offerings from Microsoft Corp., Yahoo! Inc. and Google Inc. for a share of the Internet calling market, expected to surge fourfold to about 65 million users in Japan, Western Europe and the U.S. by 2009, said Framingham, Massachusetts-based researcher IDC.

``This acquisition is extremely synergistic with eBay's core business'' by helping buyers and sellers communicate, wrote Legg Mason analyst Scott Devitt, who rates the shares ``buy.'' ``Skype with the appropriate nurturing has the killer platform in the'' Internet calling marketplace, he wrote.

The deal is EBay's biggest ever, topping its $1.5 billion purchase of electronic-payments company PayPal Inc. in October 2002, spokesman Hani Durzy said. The deal, EBay's seventh in the past year, is expected to cut 2006 earnings by 12 cents a share and add to profit in 2007, finance chief Rajiv Dutta said in an interview.

Faster Transactions

Skype was founded in August 2003 by Swede Niklas Zennstrom and Dane Janus Friis and the two will run the company at EBay. They employed the same Estonian programmers who created the calling software to build Kazaa, the Napster-like software that shook the entertainment industry by letting people share music and video files.

Skype, which only charges for calls from computers to mobile phones or traditional fixed lines, will have revenue of $60 million in 2005 and more than $200 million in 2006, according to EBay's statement today.

Chief Executive Officer Meg Whitman said on a conference call that Skype will accelerate e-commerce on EBay, whose goal is to outpace the 30 to 35 percent growth rate of online sales industry wide. EBay's revenue is estimated by analysts to grow 35 percent this year after increasing 51 percent in 2004.

Finding Revenue

``Buyers ask questions about a purchase and there are usually a lot of questions after the purchase,'' Whitman said on the call. ``Using Skype would be quicker, easier and very cost effective. Most sellers would be happy to talk to an interested buyer, especially if they could be persuaded to bid straight away.''

Some investors doubt that EBay users will benefit from Internet calling when most questions between sellers and buyers are handled with e-mail.

``I don't like the deal,'' said Norm Conley, who helps manage about $950 million at St. Louis-based J.A. Glynn & Co., including about 224,000 shares of EBay. ``There's not widespread demand for this service'' from EBay users who rarely have a problem communicating, said Conley. ``The fact that the price is high is also a concern,'' he said.

Producing Revenue

EBay also may be able to generate revenue from directing calls from interested buyers to dealers of products such as new and used cars, Dutta said. A local business, such as a plumber, that doesn't have a Web site may be willing to pay a fee for jobs generated by calls over EBay, Dutta said.

``Businesses, particularly established and local businesses, really like lead generation,'' Dutta said.

Offering such services could take from months to several years, Dutta said. ``I'd view this certainly not as an event but as a journey,'' he said.

Skype will add to EBay's revenue as the number of Internet callers surges eightfold to about 27 million U.S. users by 2009, said Framingham, Massachusetts-based researcher IDC. Skype will break even by the end of next year, Dutta said. The only country in the world where Skype doesn't have registered users is North Korea, Zennstrom said.

Voice over Internet technology in general and ``the Skype offering specifically is a disruptive technology and the industry it is disrupting has a cash flow in the tens of billions,'' said Scott Devitt, an analyst at Legg Mason Wood Walker. ``Once you have consumers in the network, you later enter fee structures once massive adoption occurs.''

Shares

Shares of San Jose, California-based EBay rose 52 cents, or 1.4 percent, to $39.14 at 1:18 p.m. Before today, they have dropped 34 percent from their Dec. 30 high, hurt by smaller gains in profit this year, and declined 3.8 percent Sept. 8 on reports the companies were holding talks.

The purchase of Skype consists of $1.3 billion in cash and 32.4 million shares, EBay said.

Goldman, Sachs & Co.'s Anthony Noto was among analysts who last week expressed skepticism about a possible purchase of Skype.

``While we think there could be some benefits to providing communication services between buyers and sellers (particularly in China), we struggle to see enough of a benefit to the marketplace from offering this service to get a sufficient return on a potential multibillion dollar price tag,'' Noto wrote Sept. 9. The New York-based analyst rates EBay shares as ``outperform.''

Acquisitions

Merrill Lynch & Co. is advising EBay while Morgan Stanley is advisor to Skype.

EBay last month bought Shopping.com Ltd. for $634 million to add another platform where sellers can list merchandise. The company in May agreed to pay an undisclosed amount for London- based Gumtree.com and Barcelona-based LoQUo.com, Web sites featuring listings for housing, jobs and items for sale. The purchase helped it expand in the U.K., Spain, South Africa, Australia and New Zealand.

The online retailer in February paid $415 million in cash for Rent.com to strengthen its foundation in the online real estate market. Among acquisitions last year, the company in August 2004 acquired a 25 percent stake in Craigslist.org, a San Francisco-based operator of classified sites for jobs, furniture and rental ads. EBay agreed to buy Netherlands-based Marktplaats.nl in November 2004 and Mobile.de in Germany in April 2004.

Microsoft last month bought Internet telephone company Teleo Inc. to allow its MSN unit to test a product developed from Teleo technology this year, the company said. San Francisco-based Teleo, acquired for an undisclosed price, makes software for placing phone calls using so-called Voice over Internet Protocol.

Founders

MSN is competing with Yahoo, which bought Internet phone software maker Dialpad Communications Inc. in June, as well as Google in adding voice communication services from a personal computer.

Skype CEO Zennstrom, 39, co-founded and served as CEO of Kazaa, according to Skype's Web site. Friis, 29, founded both ventures with Zennstrom. They met at Tele2, a European telcomn operator, where they helped launch Danish ISP get2net and the portal everyday.com.

EBay, which is debt free, entered this quarter with $2.75 billion of cash and short-term investments, up from $2.14 billion a year earlier, the company said in a statement July 20. Short- term investments include Treasury notes and other investments that can be liquidated in three to 12 months with little loss in value.

To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina at cburritt@bloomberg.net.

Last Updated: September 12, 2005 13:23 EDT