Wednesday, April 23, 2008

Why is Ebay Suing Craigslist?

The world of online auctions and classified ads is getting awfully contentious. Yesterday, Ebay filed a lawsuit against Craigslist despite the fact that Ebay actually owns a 25% stake in the website. They claim that the Craigslist's board, consisting of founder Craig Newmark and Chief Executive Jim Buckmaster, acted unilaterally in January to dilute Ebay's economic stake in the website by more than 10 percent.

While the blogosphere is all abuzz about this lawsuit (and the conspiracy-theorists are relishing the prospect of a hostile takeover), the truth is that no one really knows what Craigslist's supposed unilateral actions were that are the focus of the dispute. "The complaint is under seal because of confidentiality restrictions, according to a company statement".

So what can we make of this story?

Perhaps the most acute observations come from "Drhamad", who posted the following comment on Slashdot:

1) Craigslist is a closely held company not traded on the open market.

2) This is a dilution suit. This means that basically, in a closely held company, it's easy for a majority shareholder to screw a minority shareholder, since the minority shareholder can't outvote them and can't get other shareholders to support it. Therefore, we have a lot of laws protecting minority shareholders. In this case, it seems that eBay has issued extra stock, which means that eBay no longer really has 28%, but rather less, effectively. This CAN be legal, but there has to be a solid, nonpredatory reason for it.

3) Ebay managed to get its share [in the website] because Craigslist had issued some shares to close employees, on the assumption that it didn't matter and was just to feel nice. One of those employees decided to sell his stake publicly, and eBay bought it. Normally, no one would have been able to get access to Craigslist stock.

In the end, this case is more about juicy gossip than it is about anything too substantial. Because Ebay owns a quarter of Craigslist, it's not going to sue it out of existence. And a hostile takeover is going to be be nearly impossible for Ebay to pull off because Craigslist stock is so closely held. If our goal here is to make sense of what's happening with this story, then we can simply state that Ebay is miffed because they feel they were treated unfairly and are lashing back publicly to vent their displeasure. But it will lead to nothing except a therapeutic catharsis.

Don't listen to the hype. The gossip mongers love a public, in-house squabble, and that's really all this is.
  

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