Family owned Kruse International (pg. 1). Family owned refers to the form of ownership of this company. The reference usually means it is not publicly traded. It could still be a corporation, or a form of partnership. The advantage of the corporate form of ownership would be the ability to continue the entity irrespective of whether or not one of the shareholders dies. The advantage of the partnership form is that income would not be taxed at both a corporate level and at the individual level upon distribution.
High End Goods (pg.1). refers to goods or products that have high pricing structure. The strategy of eBay is to expand from a concentration of low priced auction items to include items of higher prices since their business model uses a percentage of final sale as the calculator of their fee. eBay had its IPO two years prior and its valuation (calculated by multiplying the number of shares outstanding by its then current stock price per share) had grown or multiplied 34 times, from 700 million to 24 billion dollars. This put its valuation higher than most banks, airlines and Fortune 500 companies (companies listed by Fortune magazine in a yearly issue ranking them in sales, earnings and valuation).
High valuation-pressure to grow (pg.1). What makes eBay�s valuation high perhaps more importantly than the total dollar amount is the price per share of the stock in relation to its earnings per share. Usually, one can find a company�s earnings per share by using a search engine such as Yahoo Finance and putting in the symbol for the stock. We can also calculate it from other information provided in the case. We know from the case that eBay had gross earnings (EBITDA) of 34 million dollars in Q1 (the first quarter of 1999 (pg.1). Its yearly gross earnings would be 4 times that amount or 136 million dollars.Its net earnings, however, were only 10 million dollars Since we know that the stock traded at 195.00 per share at that the time (pg.11), and that its total valuation then was approximately 24 billion (pg.1 and 11) we know that by dividing 195 into 24 Billion that it had about 120 million shares outstanding. If we then divided 10 million (its net earnings) by 120 million (the outstanding shares) we will have the amount earned per share, or approximately 12 cent per share. To compare this to other stocks, we compute the stock�s P/E (P/E is the percentage arrived at by dividing the stock price by the yearly earnings per share of a company. Thus we divide 195.00 (the price per share) by .12 and we have a ratio or P/E of 1625. The average P/E of all the stocks on the Standard and Poors list of the 500 largest US Corporations (referred to as the S&P or S&P 500) at the time was about 25. This means that the expectations investors and experts had of eBay was that it would grow at almost a 65 times greater rate than the average company on the S&P. In other words, its net revenues or profits were expected to grow into its valuation. In this case, its valuation was taking into account an envisioned future. While such exponential growth is easier in a new business than a mature business, (due to large potential market penetration and size of company) it is still a huge feat to accomplish. Thus the executives at eBay were looking for ways to use its model that were scalable (meaning that it could grow its top line of revenues without an equal need to spend money on either its cost of goods sold or its general overhead and administration costs). Absorbing other companies with higher priced goods was therefore a good strategy. Furthermore, accretive acquisitions (preferably using EBAY stock as the method of payment versus cash) would accelerate its earnings.
Omidyar sought venture capital backing (pg.2). Venture capital firms provide money or equity to limited numbers of enterprises due to their fairly stringent requirements for investment. Usually, VC�s (venture capitalists) require businesses to have high growth potential (meaning that the model for their operation, and hence sales and profits shows a high probability that they can be expanded), scalability, a well differentiated product or service (a product or service that is either new to the marketplace and not easily replicated for a variety of reasons- protected by patent; high cost of entry; or high market share one that has successfully garnered a large share, often majority of the market, ie. Starbucks or eBay), and a broad and skilled team. In addition, VC�s usually require a serious say in the management of the company, often sitting on the board (board of directors), a significant share of the equity for their investment and an expectation of a return on their investment, depending upon the stage in which they invest of up to 50% per annum compounded. Most VC�s will look for their investments to be paid off through a public offering within five years. Because of VC�s requirements, most partnerships are converted to C corporations (or corporations) so that control can be placed at the board of director�s level. This allows VC�s to have a significant say in operations, even when they don�t have a controlling number of shares. Corporate ownership is also necessary for an IPO. As stated in the eBay case, VC�s have good networking capabilities both for obtaining other investors and key management personnel.
5 million for a 22% stake (pg. 2). A stake is an ownership position. To determine the valuation of the company at this stage or time one would divide 5 million by .22 yielded a valuation of about 22.7 Million dollars.
Capital-intensive business (pg.7). A capital intensive business is usually a product based business. It is not very scalable. It is one in which substantial outlays of money are required to create infrastructure (plant and equipment) so as to increase production. A service-based business (a business in which skilled people are the key factor) would be labor intensive and not easily scalable. Law firms, management consultants and the like use teams made up of high and lower hourly wage earners so that the �owning partners� can benefit from the spread between what they bill the clients for hourly work and the wages they must pay their more junior staff. In eBay�s model, the work is done by computer servers and is easily ramped up (increase the customer base) without associated labor or equipment costs.
3:1 split (pg. 11). Splitting a stock is a mechanism used by companies to reduce the price per share of their stock. In a 3:1 split, a stockholder of record (a registered owner of at least one share of stock) is given three shares for each one share they own. The price of the stock is also lowered to one third of its price as of the date of the split. If the stock were 90 dollars before the 3:1 split, it would be 30 dollars after it. The total amount of shares outstanding is increased threefold. Sometimes, reverse splits are used when a stock price is so low it faces delisting or removal from an exchange.
eBay purchased Butterfield and Butterfield for 260 million in stock (pg.16). In this transaction no cash changed hands. Rather, Butterfield�s owners were given eBay shares whose value equaled 260 Million dollars. A formula would have been agreed upon between the two companies as to what date to set the stock value at. For example, it might be the date a contract of sale (an agreement between two parties to sell assets from one to another at a agreed upon future date) was signed, or the date of the actual transfer, or perhaps an average of the two. To the extent that eBay�s P/E was 1625, buying 1.5 million of net income for 260 million dollars would have been an immediately accretive transaction. Its therefore strategic plus good for earnings.
How does the need to grow affect eBay's strategy? How would the acquisition of Kruse fit that strategy?
What should meg Whitman do about Amazon? What are eBay's strengths compared to Amazon?
What is the culture of eBay and should that be preserved and why?