Inside eBay's Quest for Craigslist

Court papers show Craigslist has resisted buyout overtures from minority stakeholder eBay, and now the auction site has gone on the offensive

Craigslist founder Craig Newmark. Justin Sullivan/Getty Images

by Aaron Ricadela

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."