Inside eBay's Quest for Craigslist

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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.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.