EBay reliance on PayPal for growth lowers chances of spinoff

NEW YORK Fri Jan 24, 2014 5:33pm IST

An eBay logo is projected onto white boxes in this illustration picture taken in Warsaw, January 21, 2014. REUTEwhite RS/Kacper Pempel

An eBay logo is projected onto white boxes in this illustration picture taken in Warsaw, January 21, 2014. REUTEwhite RS/Kacper Pempel

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NEW YORK (Reuters) - EBay Inc (EBAY.O) is fighting the proposal by activist investor Carl Icahn to spin off PayPal because it views the payments service as crucial to long-term growth prospects of the e-commerce company.

The marketplaces business, eBay's biggest, is growing at a slower rate than both PayPal and eBay rival Amazon.com Inc. PayPal, estimated to be worth as much as $40 billion on its own, helps bolster eBay's share price.

And it is key to future growth opportunities. PayPal is considered a leader in U.S. mobile payments, which Forrester Research projects will triple in volume to $90 billion by 2017.

Icahn, who has roiled the tech industry by agitating for change at companies from Apple Inc (AAPL.O) and Dell Inc to Netflix, took a 0.82 percent stake in eBay this month and made a proposal for it to spin off PayPal, eBay disclosed on Wednesday. On Thursday, a source close to the matter said Icahn's stake stood closer to 2 percent.

Many Wall Street analysts do not expect Icahn's proposal to succeed. They say hiving off PayPal would weaken the parent company and compromise prospects of its marketplace business and its business services division, which handles ecommerce for major retailers.

EBay's CEO and board dismissed Icahn's proposal. Their refusal to part with PayPal may also stem from an uneasiness over whether PayPal can thrive independently.

Hot startups like Square and Stripe have raised hundreds of millions of dollars and are beginning to challenge PayPal in mobile payments.

"Marketplaces is battling Amazon in the midst of a massive eCommerce channel shift and PayPal is the clear early leader in payments," Wells Fargo analyst Matt Nemer wrote on Thursday.

"But they play in a field of well-funded innovators."

Even with a small bump following Icahn's proposal, eBay's shares are down 5.2 percent from a 52-week high last April. Since then, eBay's results have disappointed, and on Wednesday the company lowered its 2015 revenue forecast and gave a disappointing profit forecast for the current quarter.

One top Silicon Valley banker said Icahn's idea had some merit, that eBay could find ready buyers for PayPal, for instance one of the major credit card companies.

An independent PayPal also might find it easier to sign up retailers wary of entrusting payments to an eBay division.

"They would get a nice premium from it in a couple years time. It is not a stupid idea," the banker said.

CLOSING RANKS

EBay Chief Executive Officer John Donahoe, with the backing of founder and top shareholder Pierre Omidyar, who owns an 8.5 percent stake, on Wednesday forcefully dismissed Icahn's suggestion. Donahoe said eBay's three units all need one another to thrive. On Thursday, director Marc Andreessen, a Silicon Valley investor, took to Twitter to oppose the spinoff idea.

While Donahoe has the support of his board, he will need to rally shareholders. Icahn's activism has boosted share prices at other big companies.

One prominent investor reached by Reuters voiced support for eBay, and said Donahoe has successfully blended the marketplace and payment services.

EBay shares, which surged 12 percent after hours on Wednesday immediately following news of Icahn's proposal, gave back most of those gains on Thursday and closed just 1 percent higher.

PayPal was founded in the late 1990s, and acquired by eBay in 2002 for $1.5 billion, shortly after PayPal went public.

It is now eBay's fastest growing business, with 143 million active users at the end of 2013, up 16 percent from a year earlier. Paypal revenue rose 19 percent during the holiday quarter, beating a 12 percent rise at the marketplaces unit.

R.W. Baird analyst Colin Sebastian estimates PayPal is worth $30 per eBay share, contributing more than half of its parent's value even though it contributes only 41 percent of revenues.

One industry expert expressed concern PayPal on its own would struggle to innovate as much, or have access to as much funding to continue developing its technological edge.

"I doubt the same level of investment would be available to PayPal if it were a standalone company," said Denee Carrington, a senior analyst with Forrester Research. "One of the things PayPal has to do is demonstrate their ability to have success in mobile payments that's not dependent on eBay."

(Reporting by Phil Wahba and Nadia Damouni in New York; Editing by David Gregorio)

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