Last week, eBay Inc. (EBAY) announced its plans to spin off PayPal – its rapidly-growing payments business – into a publicly traded company in the second half of 2015.
Looking Back
PayPal, established in the late 1990s, went public in 2002. It was soon acquired by eBay for $1.5 billion. The deal was primarily an effort by eBay to boost PayPal’s transactions by motivating auction participants to use the latter’s online payment platform.
However, eBay apparently has not been able to realize any noteworthy merger benefits beyond pushing traffic for PayPal.
Carl Icahn, eBay's sixth-largest shareholder with a 2.48% stake as of June 30, 2014, first proposed the spin-off in January of this year. As an alternative to boost financials, in March, he proposed a plan to sell off 20% of PayPal via an IPO.
However, the idea was rejected by Chief Executive Officer John Donahoe, who then believed that the separation was “not a good idea.”
Pressure from Shareholders
The spin-off clearly represents a reversal of eBay’s view a few months ago that the two businesses were in an advantageous position together.
Is this to be seen as a by-product of pressure mounting from the company’s shareholders?
eBay’s board cites that it has reviewed the company’s strategy, and in that light it was decided that the two entities will be better off as independent public companies. The companies insist that this was not a result of any outside pressure.
Notably, eBay is not the only company that has faced activist pressure in recent years. Apple (AAPL) and Microsoft Corp. (MSFT) have also been targeted by their investors. Some of the companies have had to respond with bigger dividends, a board seat or restructurings.
Events such as this clearly show the importance of shareholder rights. Investors in companies like Alibaba Group Holding Ltd. (BABA) hardly enjoy such rights owing to its VIE structure.
The Spin-Off
The competitive landscape has come a long way since eBay bought PayPal. The online payments business is moving rapidly to the mobile devices platform, where PayPal does not have a dominant presence. Apple recently announced Apple Pay for iPhone users to facilitate payments made for online purchases. Significantly, Apple chose Stripe Inc. over PayPal for the tie-up.
On the other hand, the payment start-up by Twitter’s co-founder Jack Dorsey – Square – has also made considerable progress, having signed up many small merchants.
As a separate company, PayPal could fetch around $47 billion (based on rivals’ valuations). The separation will give PayPal more scope to form alliances with retailers and other financial firms. This, in turn, will enhance competitiveness of both the companies in their respective fields.
At the same time, a lot of analysts are of the view that the separation could make both eBay and PayPal attractive takeover targets.
Donahoe and Icahn fought over this issue for almost two months at the start of the year until a settlement was finally arrived at in April. Donahoe, who will oversee the separation of eBay into two businesses by the end of 2015, will not take up an executive role at either of the companies. Instead, he will join one or both the boards.
Devin Wenig, currently the president of eBay Marketplaces, will assume the role of CEO at eBay. Dan Schulman, who is coming over from American Express Co. (AXP), will be president of PayPal, effective immediately, and CEO of the stand-alone PayPal following separation.
The spin-off will be a costly affair. The company stated in a filing that PayPal will have to shell out a base salary of $900,000 for Dan Schulman. He will be entitled to receive equity awards worth $18 million over the next year and will be eligible for as much as $29.1 million in pay for benefits he is forfeiting at his last job at American Express (AXP).
Devin Wenig will also see his compensation rise significantly. His base salary will rise to $900,000, and will thereby, increase to $1 million following the split. He too will be eligible for bonus payments.
Looking Ahead
According to EMarketer Inc., mobile payments in the U.S. are projected to reach $118 billion by 2018, up from $3.5 billion this year.
PayPal’s foray into mobile payments, with the Braintree acquisition and its One Touch system, shows that it has been gradually moving away from online commerce.PayPal could also be opening itself up to a possible takeover by any one of eBay’s competitors.
According to eBay, it still manages around $20 billion in annual mobile sales volume. Its business, however, has been bolstered by PayPal’s strong growth. So without PayPal, eBay’s growth rate is likely to come down. However, the company will no longer be required to invest in Paypal’s growth, which could mean it will generate higher profits and cash.
eBay currently sports a Zacks Rank #4 (Sell).
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