Icahn proposed a spin-off of Paypal from eBay a few months back
In the previous article of this series, we discussed how although eBay (EBAY) managed to produce better-than-expected earnings, it faces competitive pressure from Amazon (AMZN), Google (GOOG), Facebook (FB), and Apple (AAPL), which is the reason why its stock has been range-bound in the last year. In this article, we’ll discuss updates on the proxy war between eBay and its largest investor, Carl Icahn. A few months back, Carl Icahn had proposed a spin-off of Paypal from eBay, as he has built-up a stake of 0.83% in eBay. 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.
A spin-off was never a good idea for eBay’s shareholders
Let’s look at the revenue growth comparison for eBay’s Marketplace and Paypal’s business first. The above graph shows that eBay’s main business, Marketplace, 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. Moreover, Paypal needs eBay too. 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.
How eBay made peace with Carl Icahn
During the conference call to announce the company’s Q1 2014 earnings, eBay’s CEO John Donahoe laid out a four-point memo on how the company made peace with Carl Icahn. Donahoe mentioned, “First, our teams did in fact focus on execution during Q1 and delivered a strong start to the year. Second, we executed 1.8 billion in share repurchases in the first quarter. We also announced today that we’re taking a non-cash tax charge to facilitate the repatriation of approximately $6 billion net in foreign earnings. This decision increases our available U.S. cash and enhances our financial flexibility. Bob will talk more about this in a couple of minutes.”
Donahoe further commented, “Third, we agree that our Company is better together for now. eBay and PayPal are both great businesses and they support and reinforce each other. We will continue to aggressively drive synergies that enhance our overall growth and competitive position. And our board is committed to continuing to evaluate all strategic options over time. We will make the right long-term decisions for shareholders. And finally, we have put this distraction behind us. With our agreement with Carl Icahn who now is a long-term investor in eBay, our full attention is focused on growth and execution.”