Tags: Ebay | PayPal | spinoff | payments

EBay Plans to Split Off PayPal as Mobile Payments Gain Momentum

Tuesday, 30 September 2014 11:10 AM

EBay Inc. is spinning off its PayPal division, heeding demands by activist shareholder Carl Icahn and giving the business independence it can use to contend with rising competition from Apple Inc. and Google Inc.

EBay and PayPal will become independent companies in 2015, subject to customary conditions, the San Jose, California-based company said in a statement today. Chief Executive Officer John Donahoe, who said in March a full separation was “not a good idea,” won’t have an executive role in the businesses.

An independent PayPal, which could fetch about $47 billion based on rivals’ valuations, would have more latitude to forge alliances with retailers and other financial firms as Google and Apple seek to turn their products into tools for digital payments. PayPal and EBay’s marketplaces business could also become attractive takeover targets.

“If done right, this transaction could springboard both entities into more competitive players in their respective industries,” said RJ Hottovy, an analyst at Morningstar Inc., who has a buy rating on EBay.

Donahoe sparred with Icahn for two months at the beginning of the year after the billionaire bought a stake in January, and the clash took an hostile tone until a settlement in April.

The shares of EBay jumped 6.6 percent to $56.15 at 10:23 a.m. in New York, giving the company a market capitalization of $69.6 billion.

Growth Engine

EBay, whose online marketplace sells everything from motorcycles to golf clubs via auctions and at fixed prices, bought PayPal in 2002 to add online-payment services. The unit, which almost tripled sales in the five years ended in 2012, has since become a growth engine for the company.

The competitive landscape has also changed dramatically since EBay bought PayPal. Like much of the computing industry, the business of online payments is increasingly moving to mobile devices, where PayPal isn’t as dominant. Apple this month announced Apple Pay, a way for people to use an iPhone to pay for goods in stores.

Instead of partnering with PayPal, Apple struck a deal with startup Stripe Inc. Meanwhile, Square, the payments startup started by Twitter Inc. co-founder Jack Dorsey, has made headway partnering with many small merchants.

Mobile payments in the U.S. are projected to total $118 billion by 2018, up from $3.5 billion this year, according to EMarketer.

PayPal Target

The split may value PayPal at $47 billion, applying a multiple of 1.8 times trailing 12-month revenue, similar to Amazon.com Inc.’s, to EBay’s marketplaces and advertising businesses, Bloomberg Intelligence analysts Praveen Menon and Paul Sweeney said. PayPal’s superior growth rate and unlocked value may explain the reasoning behind the separation, they wrote.

“The PayPal/EBay split makes a lot of sense for PayPal,” Denee Carrington, an analyst at Forrester Inc., wrote in a note. “The payments landscape is hyper-competitive, the pace of change is accelerating and everyone is gunning for PayPal. The split will give PayPal greater agility to help it achieve its full potential.”

The move isn’t designed to make either unit up for sale, Donahoe said on a conference call. To help the transition, Donahoe and Chief Financial Officer Bob Swan will be responsible for leading the separation of each business, with board oversight.

Management Structure

Devin Wenig, currently president of EBay Marketplaces, will become CEO of the new EBay company. Dan Schulman, who is joining PayPal from American Express, will be president of PayPal, effective immediately, and CEO-designee of the stand-alone PayPal company following separation.

Icahn didn’t immediately respond to requests for comment. While the investor and EBay’s board ended their public dispute in April, Icahn said at the time that he continued to believe in the benefit of a separation of PayPal “at some point in the near future.”

EBay is just one of the technology companies that has faced activist pressure in recent years. Apple, Microsoft Corp., Juniper Networks Inc., Yahoo! Inc. and others have also been targeted by investors including Icahn and ValueAct Holdings LP. Some of the companies have responded with bigger dividends, a board seat or restructurings.

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EBay is spinning off its PayPal division, heeding demands by activist shareholder Carl Icahn and giving the business independence it can use to contend with rising competition from Apple and Google.
Ebay, PayPal, spinoff, payments
Tuesday, 30 September 2014 11:10 AM
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