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Why Icahn’s proposed PayPal spinoff from eBay isn’t a good idea

Icahn proposed a spinoff of Paypal from eBay

eBay owns Paypal, which is a payment solution for online transactions between consumers and merchants. Over the years, Paypal has become a significant component of the company—so much so that in 2013, Paypal contributed more than 40% in revenues. After eBay (EBAY) released the results of its quarterly earnings in late January this year, the company disclosed that Carl Icahn had proposed a spinoff of Paypal from eBay. Icahn is an activist investor who has built up a 0.82% stake in eBay, while he also recently boosted his stake in Apple (AAPL) to $3 billion.

The rationale behind Icahn’s proposal was that eBay hasn’t done as well as it should have and that a separation would unlock Paypal’s value. However, eBay’s CEO, John Donahoe, said that eBay had heard Icahn but rejected his proposal. We also believe that a spinoff of Paypal from eBay would be a bad idea.

eBay-PaypalEnlarge Graph

eBay stock would suffer without Paypal

Let’s look at the revenue growth comparison for eBay’s Marketplaces and Paypal’s business first. The above graph shows that eBay’s main business, Marketplaces, has shown a growth rate of 11% to 16% in the last few years, while Paypal has shown much better growth, between 19% and 28% during the same period. So, if eBay spins off Paypal, its stock is bound to suffer even more. eBay is already considered a laggard in the Internet sector, with competitor Amazon (AMZN) showing much better stock performance in the past.

Paypal needs eBay too

During its earnings conference call, eBay mentioned that the company helps accelerate Paypal’s success. Firstly, Paypal acquires eBay customers with virtually zero cost, while 50% of Paypal’s mobile volume came from eBay in 2013. Secondly, eBay provides much-needed funding to Paypal for its growth. eBay provides a source of low-cost capital for Paypal—which would be difficult for Paypal to get if it became an independent entity. Moreover, as an independent entity, Paypal would be bound to get more competition from the likes of Visa (V) and Mastercard (MA). Startups such as Square could create more headaches for Paypal if it decided to go independent. So we believe it would be unwise for eBay to spin off Paypal.

To learn more about eBay and Paypal, see the Market Realist series Business overview: An investor’s essential guide to eBay.

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