PayPal Tumbles as EBay Buys Back Billpoint Stake

With a single transaction, EBay (Nasdaq: EBAY) managed to do what lawsuits and a raft of other bad news could not: The auction giant brought high-flying PayPal's (Nasdaq: PYPL) stock back to Earth.

EBay said on Thursday that it paid US$43.5 million to buy back the 35 percent stake in online payment service Billpoint that partner Wells Fargo (NYSE: WFC) took two years ago.

While Wells Fargo will continue to process Billpoint payments, the move will allow EBay to integrate Billpoint more closely with its auction and fixed-price sales offerings, according to the company.

Timing Is Everything

Billpoint CEO Janet Crane said the move makes sense because of the "increased integration of Billpoint and EBay over time."

The buyback came less than a week after online payment rival PayPal staged a successful initial public offering. PayPal's stock ran up from its offering price of $13 to more than $20 by the end of the company's first day of trading.

"This is obviously a move by EBay to take more direct control of Billpoint, presumably so they can more easily make aggressive moves against PayPal," Morningstar.com analyst David Kathman told the E-Commerce Times. "The timing was no coincidence."

Immediate Reaction

Though PayPal's stock price had been slipping all week, news of the EBay move sent it into a tailspin. PayPal shares dropped 15 percent Thursday to close at $15.01, down $2.81.

While the buyback was clearly a response to PayPal's successful IPO, Kathman said the move, which EBay can easily afford thanks to its deep cash reserves, also highlights the fact that Billpoint has not lived up to its prelaunch hype.

"When EBay launched Billpoint, there was a lot of talk about how it could become a big source of supplemental revenue. And in fact, EBay's stock reached its all-time high in early 2000, right after the launch," Kathman said. "But that hasn't happened. PayPal has become the dominant online payment system."

A Gartner study released on the eve of PayPal's IPO showed PayPal holds a commanding lead over No. 2 Billpoint, with 27 percent of online shoppers using PayPal and just 11 percent using Billpoint. Yahoo's PayDirect and Citibank's c2it lag well behind, Gartner found.

Not Alone

Kathman noted that the EBay offensive is the latest in a string of attacks on PayPal, which faces a copyright lawsuit, a class-action lawsuit by users and threats of regulatory action from several states.

Meanwhile, EBay found itself facing criticism on another front as New York City officials demanded that the auction site remove all items related to the World Trade Center (WTC). Officials said they will consider legal action against EBay if the items are not deleted voluntarily.

The auction giant, which temporarily banned all WTC-related items last fall, has not formally responded to the new demands but has said repeatedly that it monitors its auctions for offensive items and removes them when necessary.