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Icahn Calls For Ebay To Spin Off 20% Of PayPal In An IPO

Mar 19 2014, 2:26pm CDT | by , in News | Shopping Tips

Icahn Calls For Ebay To Spin Off 20% Of PayPal In An IPO
 
 

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Icahn Calls For Ebay To Spin Off 20% Of PayPal In An IPO

Carl Icahn fired off another letter to eBay shareholders today, purposing that it spin off 20% of its PayPal division in a public offering. Icahn held back the verbal punches he’s thrown at eBay CEO John Donahoe and board members Marc Andreessen and Scott Cook in previous letters, and instead laid out reasons why he believes the 20% spin off would be good for eBay, PayPal and shareholders. Some ideas where spot on, others might have missed the mark. First, here’s Icahn’s arguments for an eBay / PayPal spin off:

1) It would unlock value:

Currently, we believe the fair market value of eBay and PayPal are shrouded by a conglomerate discount. When compared to other e-commerce companies (such as Amazon) and financial services companies (such as Visa and MasterCard), eBay has trailed its peers in both valuation and performance over all relevant time periods.

2) It would create more-focused management:

In our opinion, eBay and PayPal would benefit tremendously from having their own independent management teams focused only on making the best strategic decisions regarding the long-term health of their respective businesses. We believe that independent management teams, together with newly constituted boards of directors (as further described below), would bring an increased level of focus to the decisions that need to be made as eBay and PayPal travel along different trajectories.

3) PayPal could attract better talent:

We believe the stock of an independent PayPal would be a valuable currency for future acquisition opportunities. Ebay recently paid $800 million in cash to acquire Braintree on behalf of PayPal. We believe consolidation in the currently fragmented and quickly developing payment processing industry is inevitable, and an independent PayPal, armed with its own stock as currency, will be better able to participate advantageously in that inevitable consolidation.

4) It could free PayPal up to form new partnerships:

For example, we believe a standalone PayPal would be more able to pursue potential strategic partnerships with other industry leaders, such as Visa, MasterCard, Google, Facebook, Alibaba, etc., that could solidify PayPal’s long-term relevance.

5) It maintains the current eBay/PayPal mojo:

We believe that the only potentially legitimate defense that eBay’s management has offered to date – certain synergies that result from keeping eBay and PayPal together – can be maintained through a contractual business relationship consummated before an IPO and do not actually require eBay owning 100% of PayPal.

6) PayPal could move faster and make itself into a bank:

We believe PayPal has a significant opportunity to expand its product offerings to include check writing, direct deposits, interest on PayPal balances and other financial conveniences that consumers expect, which were highlighted by David O. Sacks, one of the original architects of PayPal.[6] Under the current eBay leadership, PayPal has actually removed beneficial services to customers such as providing interest on PayPal deposits. We believe that focus from a dedicated management team, unencumbered by competing agendas, could drive more innovation at a faster pace.

7) It would create more focused boards:

We believe PayPal has a significant opportunity to expand its product offerings to include check writing, direct deposits, interest on PayPal balances and other financial conveniences that consumers expect, which were highlighted by David O. Sacks, one of the original architects of PayPal.[6] Under the current eBay leadership, PayPal has actually removed beneficial services to customers such as providing interest on PayPal deposits. We believe that focus from a dedicated management team, unencumbered by competing agendas, could drive more innovation at a faster pace.

I agree that the spin off would unlock value to shareholders currently trapped in the two-headed company. Ebay’s marketplace business and PayPal’s payment business are different beasts with two different earning multiples (Bank of America annalist, Justin Post, puts a 14x multiple on eBay and a 22x multiple on PayPal). By spinning off PayPal, you can reap the difference, and give investors a clear vision of how the companies plan to grow and make money. I also think the spin off would open PayPal up to new partnerships (after all, big tech retailers–and potential customers–like Amazon see eBay as a competitor) and would give more freedom for PayPal to act like a bank. As I wrote before, both Elon Musk and David Sacks think that PayPal could be the largest bank on the planet and eventually hit a valuation of $100 billion–but it can’t make that leap while still part of eBay (for one, eBay doesn’t want to be regulated like a bank, nor should it want to). PayPal could split off and become a financial company all while (as Icahn, Musk and Sacks argue) keep the profitable synergy with eBay’s marketplace business through a contract.

I don’t agree, however, with the Icahn proposal that the spin off would help PayPal attract new talent and create new products–PayPal is already doing that. PayPal’s new president David Marcus has been busy overhauling the payment company since he took over two years ago. He’s made smart acquisitions (Braintree), rebuilt the entire technology stack (Node.js!), launched new products (PayPal Here, PayPal mobile wallet, PayPal Beacon) and attracted top talent like Bill Scot (Netflix) Arnold Goldberg (Box) and Stan Chudnovsky (Iron Pearl).

Ebay and PayPal must separate one day-. In 2013 PayPal’s revenue grew 20% to $6.6 billion–41% of eBay’s total revenue and 36% of its profits. In the next few years, PayPal will overtake eBay’s marketplace business and would likely be spun off soon after. But for now, eBay is adamant about holding onto PayPal and has created a special website dubbed “Better Together” to defend it’s stance against Icahn’s complaints.

Source: Forbes

 

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