eBay’s board of directors this week urged shareholders to reject Carl Icahn’s plan to spin off PayPal as a separate company.
“Our shareholders and our customers are best served by keeping PayPal and eBay together,” the board said in a letter to investors. “No other payments competitor has achieved PayPal’s success — because no other competitor has had a commerce platform like eBay.”
The eBay board narrowed down its decision to a few core reasons: eBay accelerates PayPal’s growth and success; sharing data results in more profitable growth; eBay provides PayPal with efficient capital; and commerce and payments are converging.
Commerce, Payments Leader
eBay is a commerce and payments leader in a quickly evolving marketplace, and the line between online and offline commerce is vanishing, the board noted, while mobile commerce changes consumer behavior.
Scalable, flexible and integrated digital commerce and payments platforms are important competitive advantages in the current landscape, it argued.
eBay is in a strong position as a global leader and innovator to drive long-term growth and provide sustainable value to shareholders, the board therefore claimed.
Investor Icahn offered a nonbinding proposal to turn PayPal into its own publicly traded company and nominated two of his employees to eBay’s board.
After carefully examining Icahn’s proposal, the eBay board said — noting that it had considered the suggestion in the past — it did not support his suggestions.
The board underlined the effectiveness of PayPal and eBay operating in tandem through its financial results. In the last five years, the companies have increased share price by 441 percent. In 2013, eBay saw US$22 billion and PayPal $27 billion in mobile commerce volume. Revenue grew by 14 percent year-over-year, while non-GAAP earnings per share grew by 15 percent year-over-year.
The board underlined the synergy between the two platforms by noting PayPal’s growth through eBay’s services. It noted that eBay delivers around 30 percent of new PayPal users, more than 30 percent of PayPal revenue, and around half of PayPal’s profits.
The board urged shareholders to vote down Icahn’s proposal and to reject Icahn’s two nominees to eBay’s board owing to a lack of experience.
Icahn recently has distanced himself from his own proposal, it noted, in favor of a “carve-out” initial public offering of PayPal instead of a full spinoff.
Icahn last week called for eBay to sell off 20 percent of PayPal in an IPO.
20 Percent Solution
“Without question, eBay and PayPal are leaders in their respective markets,” said Jordan McKee, a mobile marketing and commerce analyst at Yankee Group.
“Much of this success is owed to the many synergies that exist between the companies. Payments and commerce are becoming inextricably intertwined, and as a result, the benefits PayPal and eBay enjoy from their relationship will only increase. This symbiotic relationship gives both entities a highly unique and advantageous position in the market that no other competitor enjoys,” he told the E-Commerce Times.
“The growing impact of mobility on the overall shopping journey will continue to expose the many advantages in the years ahead,” McKee continued.
“While I would agree that on the surface it may seem a bit peculiar for an auction company to own a global payments company, looking under the hood at the underlying dynamics of both organizations makes the value of the relationship apparent,” he explained.
“Carl Icahn’s revised proposal for partial spinoff of PayPal from eBay appears to have significantly weakened his initial argument,” said David Cadden, a professor of entrepreneurship and strategy at Quinnipiac University.
“Many analysts believe that PayPal and eBay may be one of those rare cases where the dreaded word ‘synergy’ actually works,” he told the E-Commerce Times.
“This would mean that there’s no benefit in either total or partial spinoff. What initially looked like a sincere attempt to improve the management of PayPal — because it would be a separate entity — now looks like an opportunity for a quick kill from a short-term investment.”
The possibility of PayPal becoming an independent company, which now seems somewhat remote, raises intriguing questions about its governance and future.
“Traditionally governance has been difficult to explain to individual shareholders, but they do understand — and will be dismayed by — allegations of insiders enriching themselves at the expense of ordinary investors, as well as allegations that competitors benefit from inside information,” Andrea Belz, principal of Belz Consulting Group, told the E-Commerce Times.
“Icahn’s actual proposal is interesting,” said Belz, “because it asks the fundamental question: Does eBay want to be a bank, and what is a bank today? If PayPal is spun off as an independent bank, how will it be regulated, and what does it mean for the future of the banking industry?
“Should eBay and PayPal be managed by the same board if they are in fundamentally different businesses, and could they each present more opportunities — and more shareholder value — operating under a narrow partnership instead?” she wondered. “These are major strategic questions that speak to the future of Internet commerce.”