eBay Inc, Market Cap (as of 03/10/2014): $67.46bn
On September 30, John Danahoe, president and CEO of eBay, revealed the intention to spin-off its payments arm PayPal into a publicly traded company by the end of the next year. The CEO pointed out that, although both companies are already two great businesses and leaders in their respective markets, this decision is the answer to a fast changing market. The spin-off is supposed to create two independent companies that “will be sharper and stronger, and more focused and competitive as leading, standalone companies in their respective markets”, Danahoe said. In addition, this strategy would enable both companies to exploit more flexibility in order to face specific issues of each market, delivering sustainable value for the shareholders. After the spin-off, Mr Donahoe will not be the top executive. Devin Wenig, current president of eBay marketplaces, will become the CEO of the new eBay. The ex-American Express Dan Schulman, who already had top executive experiences in firms like AT&T and Virgin Mobile USA, is the new president of PayPal and will become the CEO after the spin-off.
While eBay, twelve years ago, acquired PayPal for $1.5bn, some analysts believe the online payment company could be worth more than $30bn. The day after the announcement, shares of eBay, soaring more than 7%, closed at $ 56.7, which represents its high for 2014. Combining two strong business models, such as the ones of eBay and Paypal, has guaranteed to both companies huge advantages, but sometimes the needs of the emerging business come second to the ones of the more mature company. The two firms together were able to exploit economies of scale, as PayPal core business is strongly correlated to eBay’s one, and to provide capital to the emerging business, which is now competing also with the rise of Apple Pay and digital currencies. The fact that also Yahoo’s investors decided to refocus on its US media business, clearly shows that the time of “synergies” has become the time of “avoiding dis-synergies”, even if it is hard to believe that the e-commerce business has radically changed in the last few months.
Carl Icahn, a prominent activist investor, is a shareholder in eBay and was vocal about spinning off 20% of PayPal in Q1 this year. At that moment eBay’s management was strongly opposed to the idea, and to avoid a potential proxy fight, reached a compromise putting an Icahn’s ally on its board. One of the reasons for opposing to the spin-off in Q1 was a strategic review that the company was going through at that point. The management believed that PayPal is instrumental to its parent eBay with dis-synergies and distraction caused by the spin-off making the company miss out on several growth opportunities that the market was offering. The opinion has changed as PayPal now generates only 15% out of its volume from eBay, while its other partnerships, notably with Uber and AirBnB, are getting a larger stake fuelled by eBay’s acquisition of Braintree, a smaller payments provider. Furthermore, the eBay-PayPal tie is perceived as a barrier to develop relationships with Amazon and potentially Alibaba, two competitors of eBay. At the announcement on Monday, Icahn Associates gained $138m on the stake of 2.5% that the fund is holding in eBay.
For investors, the spin-off means a bet on disrupting the credit card companies, where PayPal has potential. But the disruption will not come easy. Since 1998, this was the main task of PayPal, and while it expanded its market considerably, the EBITDA margin (26%) remains lower than for Visa and MasterCard (roughly 65%). The margins will stay low due to reinvestment in ecosystem and strong competition. For example, the newly launched Apple Pay will only have banks and credit card companies on its ecosystem. In fact, Apple was in talks with PayPal to be on its payment platform, but the deal broke off as PayPal secured partnership with Samsung in its payment ecosystem for Galaxy S5. Users can tie their PayPal accounts to the fingerprint reader on S5, a system in direct rivalry to Apple ID. Although Apple Pay merchants will have to pay higher fees than the ones using PayPal, the popularity of Apple products cannot be underestimated as a driving force for the ecosystem.
Goldman Sachs will be the lead adviser for the spin-off therefore solidifying its first rank for what concerns this industry, according to Thomson Reuters. Also, Ebay hired Allen & Company as second adviser in the deal.
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