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ECommerceTimes.com

PayPal, eBay Headed for Splitsville

By John P. Mello Jr.
Oct 1, 2014 12:15 PM PT
paypal-ebay

eBay on Tuesday announced that its 12-year marriage to PayPal was coming to an end. The move comes mere months after eBay beat down an attempt by corporate raider Carl Icahn to peel PayPal from the online auction site.

"For more than a decade, eBay and PayPal have mutually benefited from being part of one company, creating substantial shareholder value," said eBay President and CEO John Donahoe.

"However, a thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively," he noted.

"The industry landscape is changing, and each business faces different competitive opportunities and challenges," added Donahoe.

Disastrous Separation

Rebuffed earlier this year when he tried to force a split of eBay and PayPal, Icahn praised the separation.

"We are happy that eBay's board and management have acted responsibly concerning the separation -- perhaps a little later than they should have, but earlier than we expected," he said.

"As I have said in the past and have continued to maintain, it is almost a no-brainer that these companies should be separated to increase the value of these great assets and thus to meaningfully enhance value for all shareholders," Icahn added.

"It also continues to be my belief that the payments industry, of which PayPal is an important part, must be consolidated -- either through acquisitions made by PayPal or a merger between PayPal and another strong player in the industry," he maintained.

Not everyone agrees with Icahn and Donahoe on the merits of the split.

"Everyone in our industry knows that eBay's purchase of PayPal back in 2002 is largely regarded as a categorical homerun and a textbook example of synergy executed right," Forrester analyst Sucharita Mulpuru wrote in a blog in March.

PayPal gives eBay buyers a frictionless and trustworthy way to complete transactions, and eBay remains PayPal's most important retail partner -- a source of customer acquisition around the world and a funding source for innovation in payments, she noted.

"The entire e-commerce industry in the U.S. has an equally vested interest in keeping these two businesses together as the long-term impact on online retailers of a separate PayPal would be disastrous," she wrote.

Wall Street Play

However, others are more sanguine about the split.

"This is all about big finance and Wall Street," said Patrick Moorhead, founder and principal analyst at Moor Insights and Strategy.

"It's about unlocking the value of the companies," he told the E-Commerce Times. "PayPal and eBay together are worth less than eBay and PayPal as separate companies with separate stocks."

Competition from Alibaba, which recently raised US$230 billion in a public offering, and Apple, with its new Apple Pay mobile payment offering, may have influenced the decision to split the companies.

"Apple Pay was the straw that broke the camel's back on this," Moorhead said. "It's going to break the logjam at the point of purchase for electronic payment systems."

Separation of the companies is necessary in order to give each company the agility to perform better in an increasingly competitive global environment, according to eBay. Separation will create a sharper strategic focus and better position for each business to capitalize on emerging growth opportunities.

Chip and Pin Challenge

Among those opportunities may be business for PayPal that's been hampered by eBay.

"There are retail competitors to eBay who don't use PayPal because it's affiliated with eBay," Moorhead explained. Those competitors may be attracted to an independent PayPal.

While it's unlikely even an independent PayPal will attract the likes of an Amazon or Alibaba into its fold, it could have appeal to other eBay competitors, suggested SNL Financial analyst Seth Shafer.

"It removes the competitive overhang for retailers who want to work with PayPal," he told the E-Commerce Times.

Although a good decision, the split still leaves PayPal with problems it must address to remain a lively player in the market, cautioned Trip Chowdhry, managing director for equity research at Global Equities Research.

For one thing, PayPal does not have a road map for complying with new security regulations on conducting credit card transactions, he pointed out.

"By the end of 2015, Visa has mandated that all transactions will need to be based on chip and pin technology," he told the E-Commerce Times. "PayPal does not have pin and chip technology."

PayPal's systems use the cloud exclusively.

"Going from the cloud to chip and pin is not easy," Chowdhry said. "We have seen that with Google Wallet."


John Mello is a freelance technology writer and contributor to Chief Security Officer magazine. You can connect with him on Google+.


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