Inside eBay's Quest for Craigslist
Online classified ad site Craigslist is none too happy with having e-commerce giant eBay (EBAY) hold a stake in its business. And eBay isn't taking kindly to Craigslist's efforts to diminish that ownership. The extent of both sides' displeasure was made plain in court papers unsealed in Delaware on Apr. 30.
The documents uncover years of wrangling as Craigslist became increasingly uncomfortable with eBay's minority ownership and resisted the larger company's acquisition overtures. The tussle reflects eBay's determination to maintain at least partial control of a successful, expanding company as growth in its own core business slows and its share value declines.
EBay kicked off the legal battle with an Apr. 22 lawsuit accusing Craigslist of illegally reducing its ownership. According to the lawsuit, Craigslist diluted eBay's holding, initially at 28.4%, to less than 25%, thereby negating eBay's right to elect a director to Craigslist's board. Founded by Craig Newmark in 1995, Craigslist is worth "several billion dollars, thereby making eBay's minority stake highly valuable," according to the lawsuit.
E-Mails from Meg Whitman
Craigslist is so valuable, in fact, that eBay indicated it would like to buy the portion it didn't already own. The Delaware Chancery Court released a copy of eBay's suit that reveals a series of e-mails sent last year between former eBay CEO Meg Whitman and Craigslist CEO Jim Buckmaster. "We would welcome the opportunity to acquire the remainder" of Craigslist whenever its owners "feel it would be appropriate," Whitman wrote in an e-mail dated July 23, according to the papers.
The desire to buy Craigslist is consistent with eBay's strategy under Whitman and new CEO John Donahoe, who took over Apr. 1, to move beyond its traditional online auction business into other areas of e-commerce, including payments and Web-based communications. Purchases include online payments pioneer PayPal, Internet phone company Skype, and ticket sales site StubHub. EBay also opened its own online classified ad site, Kijiji, which competes with Craigslist (BusinessWeek.com, 7/6/07).
According to the lawsuit, eBay bought a 28.4% stake in Craigslist in 2004 from a former partner of Newmark's, whose name was struck from the unsealed copy of the suit, for an undisclosed amount. Relations soured as eBay prepared to open a U.S. version of Kijiji last year. In June, 2007, Buckmaster sent eBay a letter saying that the U.S. launch of Kijiji could affect eBay's ownership rights, since it constituted competitive activity. The following month, Buckmaster sent an e-mail to Whitman, who retired as CEO on Mar. 31, saying that Craigslist was "no longer comfortable having eBay as a shareholder," and wanted to either repurchase eBay's shares or have eBay sell them off. That's when Whitman said eBay wanted to buy the rest of Craigslist, making it clear eBay had no intention of selling its shares.
Annoyance at Share Dilution
Craiglist later took steps to reduce eBay's stake. In December, 2007, and January, 2008, Craigslist changed its bylaws to dilute eBay's ownership to 24.85%, removing its right to appoint a Craigslist board member, the suit said. Craigslist also adopted a measure that constrains eBay's ability to sell its stake.
The court redacted some financial details of the suit. But its language makes plain eBay's impatience at having its stake reduced. EBay's complaint calls the moves "self-interested, self-dealing transactions detrimental to eBay."
Buckmaster and Newmark, who are the company's sole directors and control about 71% of its stock, "breached their fiduciary duties" through a series of "clandestine transactions" designed to ensure eBay wouldn't be able to elect a Craigslist director, and to restrict or dilute eBay's ownership, the complaint said. The moves "robbed eBay of valuable economic…rights" to the company.
Foremost for eBay, Craigslist is a "good investment," says eBay spokesperson Kim Rubey. The site, which lets users post online ads for apartments, used cars, jobs, and other goods and services, is financially successful and has long-term value for eBay's shareholders, Rubey says. EBay was open to acquiring more of Craigslist, and the suit seeks to reverse changes to Craigslist's bylaws that would prevent it from doing so. "We're just trying to return to the status quo," she says.
In a statement issued Apr. 30 on its Web site, Craigslist said eBay threatened its online classifieds franchise. "We have an uncomfortably conflicted shareholder in our midst, one that is obsessed with dominating online classifieds," the company said. A Craigslist spokesperson declined to comment beyond the statement, but said Craigslist plans to issue a formal response to the eBay suit.
Coping with a Slowdown
One Wall Street analyst, speaking on condition of anonymity, said eBay hasn't released enough information to determine whether Kijiji is successful. But he added that the lawsuit likely won't have a material effect on eBay's stock price.
The court moves come as eBay copes with a slowdown in its main U.S. business. It reported first-quarter results Apr. 16 that beat analysts' estimates, and raised its revenue guidance for the year, largely on the strength of international buyers. But eBay's U.S. business slowed (BusinessWeek.com, 4/17/08) during the quarter. A 5% increase in the dollar value of all goods sold on eBay in the U.S. during the quarter shows it's losing market share, and "economic headwinds offer no near-term relief," Citigroup (C) Internet research director Mark Mahaney wrote in an Apr. 17 research note. Mahaney has a hold rating on the stock.
Over the longer term, Amazon.com (AMZN) and Google (GOOG) "could undermine the terminal value" of eBay's business, Stifel Nicolaus (SF) analyst Scott Devitt wrote in an Apr. 23 note. "EBay's slowing core growth could be difficult to reverse," added Devitt, who also rates the stock a hold. Shares of eBay rose 49¢, or 1.6%, to 31.78 on May 1. The stock has declined 5% during the past year, compared with a 2% decline in the Nasdaq.
Meanwhile, Craigslist, with just 25 employees, attracts 40 million visitors a month, 30 million of whom are in the U.S. But the company, based in a small office in a Victorian house in San Francisco, has made little attempt to increase profits from those visits, which it says are responsible for 10 billion page views a month.
In Craigslist's initial Apr. 22 response to the suit on its Web site, the company said "eBay has absolutely no reason to feel threatened here—unless of course they're contemplating a hostile takeover." EBay hasn't gone that far yet. But its lawsuit leaves little doubt the company is pulling out more stops to grab a larger share of what it sees as a ticket to growth.