Carl Icahn won at eBay Inc. after all.
This story first appeared in the October 1, 2014 issue of WWD. Subscribe Today.
The online marketplace and payment platforms company said on Tuesday it would spin off its PayPal division in the second half of 2015, leaving eBay with just its marketplace business.
The decision by the board to spin off PayPal is an about-face from its stance last spring to keep the businesses together, despite aggressive pushing for a separation by activist investor Icahn. He at one point in the battle called eBay one of the worst-run firms he had ever seen, an attack on the company’s corporate governance policies. Icahn launched a proxy fight, with the two burying the hatchet in April and Icahn withdrawing his demand for two board seats. He also agreed not to push for a separation of PayPal. The two agreed to add David W. Dorman, former chairman and chief executive officer of AT&T, to eBay’s board.
Reports surfaced Tuesday that Dan Loeb’s Third Point hedge fund had a big stake in eBay, with Loeb also playing a role in the decision to separate PayPal.
But clearly, Icahn has had substantial influence for some time. EBay revealed in January that the two were sparring. And Icahn at one point elected to push for a partial sale of PayPal instead of an outright spin-off. Moreover, eBay chief executive officer John Donahoe in a conference call to Wall Street Tuesday said the company began its annual “strategic exercise” earlier this year, and completed the process over the summer. Questions the team asked itself included what would be the competitive and technological environment over the next three to five years, how to best position the company, what are the synergies and what are the strategic options, Donahoe said.
Icahn said on his blog Tuesday: “We are happy that eBay’s board and management have acted responsibly concerning the separation — perhaps a little later than they should have, but earlier than we expected….It also continues to be my belief that the payments industry, of which PayPal is an important part, must be consolidated — either through acquisitions made by PayPal or a merger between PayPal and another strong player in the industry. It is possible that this could be accomplished through a reverse Morris Trust structure because, in light of the development of strong competition such as the advent of Apple Pay, the sooner these consolidations take place, the better. As one of the largest shareholders of eBay, I intend to have discussions in the near future with John Donahoe who, as I have said in the past and continue to believe, has the interest of enhancing value for all shareholders as his major concern.”
Investors were clearly cheered by the news that eBay planned to unlock the value in its payments division — they sent the firm’s shares up 7.5 percent Tuesday to close at $56.63 in Nasdaq trading.
While eBay has evolved to more than just an auctions site — it did that in part via its 2002 acquisition of PayPal for $1.5 billion, followed by the acquisition of PayPal competitor Bill Me Later in 2008 for close to $1 billion — separating the two businesses has its risks. Following the separation into two independently operated public companies, which eBay on Tuesday said includes preserving eBay and PayPal’s relationships through arm’s length operating agreements, the new eBay operation could find itself at a disadvantage.
As one entity, the two businesses can share internal information on customer shopping patterns, data analytics that would no longer be shared as freely as before and possibly be sold as a service to eBay’s competitors. Further, although RBC Capital Markets analyst Mark S. Mahaney views the spin-off as a positive, he also noted that the transaction “implies negative trends for the eBay marketplace business, which has been suffering from greater competitive headwinds recently.” A future slowdown in consumer spending, plus new online competitors, would also hurt eBay. Further, the company’s debt will remain with the core eBay marketplace business.
And while PayPal seems to be the faster-growing business — eBay said there are 152 million active digital wallets, while PayPal said last year that its mobile payments almost doubled to $27 billion from $14 billion in 2012 — the separation of the two businesses is also not without risk to the payments platform.
Matt Nemer at Wells Fargo noted that mergers and acquisitions activity in the technology and e-commerce space could put both eBay and PayPal in play following the spin-off. Others, such as Chad Bartley of Pacific Crest Securities, see Google and Apple Pay as key competitors that could take away market share. Mahaney noted that the lack of debt on PayPal’s balance sheet “means that PayPal may pursue aggressive strategic actions post the spin[off].”
Donahoe and chief financial officer Bob Swan in the conference call spoke about how the separation enhances shareholder value because it allows each business to focus on its own growth opportunities. Donahoe told analysts that the time was right to create two independent platforms, given that the “market for commerce and the market for payments is going through accelerating change, and the competitive environment is changing at a very fast and exciting rate.” He also noted that the current synergies between the two now will “naturally decline over time as PayPal’s business off eBay grows faster than on eBay, and that we can realize the benefits of those synergies through arm’s-length commercial agreements.”
Donahoe noted that eBay has close to $10 billion in revenue with strong cash flow, while PayPal has more than $7 billion in revenue. Further, eBay represents less than 30 percent of PayPal’s total volume, and in three years time is projected to be less than 15 percent.
While eBay’s board has approved a plan to separate the company into two businesses, Swan said the actual steps to complete the process and finalize the transition service agreements are still subject to Securities and Exchange Commission review, as well as board approval.
Dan Schulman has been named president of PayPal, effective immediately. He will become ceo of PayPal following the completion of the spin-off. Since 2010, he has been president of American Express’ Enterprise Growth Group, which has the mandate to expand alternative mobile and online payment services. He was also involved with American Express’ joint venture with flash-sale site Vente Privee.
Devin Wenig, now president of eBay Marketplaces, will become ceo of the new eBay after the PayPal spin-off is completed.
Donahoe and Swan are expected to serve on the boards of both companies.