Even after their forthcoming corporate split, eBay Inc. EBAY and PayPal have decided to remain friends (well, at least for 5 years).
The Split
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. Six months ago, eBay gave in to Icahn and decided to spin off PayPal.
The actual split, which is expected to unlock shareholder value, is expected to take place later this year.
Post Break Up
In order to keep the two independent companies healthy on their own, the two have signed an agreement that forbids them from competing against each other in their core operation, post separation.
According the agreement made in a regulatory filing on Thursday, both the entities will have to remain in their individual lines of business. PayPal is prohibited from building its own marketplace for physical goods, while eBay has to stay away from creating a payments system.
However, if PayPal does get acquired by an e-commerce competitor of eBay, then the latter can foray into the payment space after giving PayPal an advance notice of 15 to 21 months.
The deal is for a period of five years, excluding a one-year transition period.
Though the companies are prohibited to vie against each other, they are allowed to take advantage of business opportunities.
This means that eBay can work with other payments processors and PayPal can provide services to other online retailers and marketplaces like Amazon.com AMZN and Alibaba BABA following its split. However, eBay has to make sure that it conducts 80% of its transactions via PayPal – with commissions depending on the number of transactions – so as to guarantee it a stable source of revenues.
The agreement also includes some details about the composition of the boards of the two companies. Tom Tierney, who is currently an eBay board member, will chair the new eBay board. He will be joined by the current eBay CFO Bob Swan. Devin Wenig will be the future eBay CEO. The current eBay CEO John Donahoe will chair PayPal’s board. PayPal’s board will also include future PayPal CEO Dan Schulman.
eBay founder Pierre Omidyar will serve both the boards.
eBay holds a Zacks Rank #4 (Sell).
A better-ranked stock in the space is PetMed Express, Inc. PETS as it carries a Zacks Rank #2 (Buy).
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