Media Moves

Coverage: eBay and PayPal call it quits

October 1, 2014

Posted by Liz Hester

OK, so it’s not really a divorce, but eBay caved to pressure and announced Tuesday it would spin off PayPal into a separately traded public company. At a time when other Internet companies are flush with cash (Yahoo and Alibaba come to mind), the decision is an interesting one.

The Reuters story by Deepa Seetharaman and Supantha Mukherjee said the move would make eBay more competitive:

EBay Inc’s agreement on Tuesday to spin off PayPal next year will give the unit more flexibility to strike deals in the rapidly evolving payments space as growth at the company’s traditional e-commerce business slows.

The surprise move is a huge about-face for eBay’s leadership, including Chief Executive Officer John Donahoe, who resisted shareholder activist Carl Icahn’s calls for a split earlier this year and led a months-long campaign to convince investors that eBay should remain intact.

Icahn, eBay’s sixth-largest shareholder, eventually backed off in April. But eBay directors and executives shifted their stance on the split in June after a six-month internal study of the payments landscape, Donahoe said in an interview.

“We felt like a couple things were changing,” Donahoe said. “Most notably, the pace of change in this competitive environment, and payments and commerce is accelerating and will continue to over the next three to five years.”

The New York Times story by Michael J. de la Merced and Andrew Ross Sorkin offered details about how eBay changed its mind about a PayPal spinoff:

After settling a fight with Mr. Icahn in April, giving him almost nothing other than adding a mutually agreed-upon director, the company gave little indication that a separation would happen anytime soon.

Yet Mr. Icahn succeeded in the long run. In an interview, Mr. Donahoe acknowledged that eBay was following the strategy Mr. Icahn had recommended and that the company had vocally rejected.

We “got to the same place that Carl said early on,” he said.

But he contended the company arrived at its conclusion through “a deliberate process,” and not by reacting to outside pressure.

Still, Mr. Donahoe allowed that “the pace of change accelerated over the past six months” in the payments sector, citing the emergence of Apple Pay and Alibaba’s initial public offering. (He later contended that the company had seen such developments on the horizon, arguing, “I don’t think we were late.”)

He added that spinning out PayPal had another important benefit: attracting a new leader. “How do I get the best C.E.O. going forward?” he said.

Greg Bensinger, David Benoit and Daisuke Wakabayashi ofThe Wall Street Journal attributed the move to the need to compete in the payments market, which just saw Apple enter the market:

Competition in electronic payments has escalated since Mr. Icahn first proposed the separation in January. That challenged eBay’s plans to bring PayPal to more brick-and-mortar retail outlets, where more than 90% of consumer purchases are made today.

Apple this month introduces its new in-store payments service tied to its iPhone 6 models. Apple Pay will work at McDonald’s, Macy’s and other retailers, and promises to put mobile payments in the hands of tens of millions of more customers.

“Everyone is out to eat PayPal’s lunch,” said Jordan McKee, a senior analyst for mobile payments at 451 Research. “Now more than ever, PayPal needs to innovate, be nimble and move fast to fend off these competitive threats.”

Analysts expect that once separated, both companies could be involved in or the target of subsequent deals. PayPal, with 152.5 million users and a potential market capitalization estimated at $31.5 billion, could become an acquisition target for bigger players looking to expand in digital payments, or an acquirer itself.

Piper Jaffray analyst Gene Munster said eBay could make a more attractive—and affordable—takeover candidate to companies that wouldn’t have been able to afford the combined business.

Amazon.com Inc., Google Inc. and a host of startups are planning their own payment services. Facebook Inc. and Twitter Inc. also are testing ways for users to purchase items within social networks, suggesting they may expand into payments in the future. The recent initial public offering of Alibaba Group Holding Ltd. shone a light on its online-payment service, Alipay.

CNET reported in a story by Roger Cheng that the move would also bring in new leadership:

The separation will bring in two new leaders. Devin Wenig, eBay Marketplaces president, will become the new CEO of eBay. Dan Schulman, president of the American Express Enterprise Growth Group, will serve as the new CEO of PayPal.

Current eBay CEO John Donahoe and CFO Bob Swan will help with the transition but then no longer serve as executives at either of the companies. The split is expected to happen in the second half of 2015.

The move marks the end of what has been seen as an awkward partnership since eBay acquired PayPal for $1.5 billion in 2002. The deal was initially pitched as a way for eBay to boost PayPal transactions by driving auction participants toward the online payment service. But eBay itself apparently couldn’t realize any significant merger benefits beyond pushing traffic.

Whether or not PayPal can compete with the other payment systems, it is interesting that eBay decided to spin it off instead of selling it outright. Both are strong brands and will likely be successful companies on their own, but in this time of consolidation and mergers, it is against the trend to split the company in half. What is clear is that investors are likely to make money from both companies given their positions in the market.

Subscribe to TBN

Receive updates about new stories in the industry daily or weekly.

Subscribe to TBN

Receive updates about new stories in the industry.