by James Brumley | January 23, 2014 9:38 am
Look out! Carl Icahn is on the rampage again, only this time it’s not just Apple (AAPL) that has his blood pumping. On Wednesday, the highly vocal activist investor recommended that eBay (EBAY) spin off its PayPal division as a way to unlock shareholder value and juice EBAY stock.
Is it a good idea? Sure, on paper — breaking a multi-faceted company down into its smaller, standalone parts makes it easier for investors to see exactly what they own.
But sometimes, a company is better off just dealing with keeping two distinct divisions operating under one roof.
Ebay is one of those companies.
Just so there’s no confusion, it’s not as if Carl Icahn made a random observation as a disinterested, third-party observer — he now owns nearly 1% of all EBAY stock.
It wasn’t just an off-the-cuff hypothetical, either. Carl Icahn submitted a nonbinding proposal to spur the spinoff at the same time he nominated two of his own people to the board. There’s no guarantee those two individuals will be placed on the board — and even if they are, there’s no guarantee the board will agree to split eBay into two pieces. Still, in the name of “unlocking value,” Icahn has to at least give it a shot.
If the idea of splitting up eBay and PayPal rings a bell, there are a couple of possible reasons. One is the fact that eBay has considered doing so before. Several times, in fact. It came up in 2009 when both Skype and PayPal were on the chopping block, again in early 2012 when then-PayPal president Scott Thompson left his post for a position at the helm of Yahoo (YHOO), and it’s an idea that’s been floated to lesser degrees several times since eBay acquired PayPal back in 2002. Each time the issue has been pressed, eBay decided to hold into the payment-making division.
If the idea of Carl Icahn wanting to split a company up seems vaguely familiar, too … well, that’s hardly anything new, either. Icahn was the key driver behind Transocean (RIG) opting to divest some of its master limited partnership holdings, he desperately wanted OshKosh (OSK) to spin off JLG, and somehow Icahn got credit for sparking Motorola’s (MSI) spinoff of its mobile phone business.
The spinoff is just one of Icahn’s oft-used ideas in a relatively small bag of tricks. (The other mainstay is harassing a company into giving a great deal of its cash back to shareholders, but that’s another story.)
But the $64,000 question is, will a spinoff of PayPal truly be the best outcome for current EBAY stock owners? Or is Carl Icahn just looking to make a quick buck, then aiming to move on to the next target?
Just for the record, Icahn’s intuitions aren’t always right. He became a huge Blockbuster stakeholder in 2005, and his position began losing ground immediately. By 2010, Blockbuster filed for bankruptcy.
Icahn also took on a 10% stake in Guaranty Financial in early 2008, with plans to force parent company Temple-Inland to spin off the bond insurer. Guaranty Financial declared bankruptcy a year-and-a-half later.
Point being, just because Icahn is a billionaire doesn’t make him right every time. Likewise, he might well be wrong about PayPal.
In fact, he probably is.
Yes, it’s true that the PayPal division is growing much faster than online-auction revenue is for eBay. Last quarter, the payment arm of the company saw a 19% increase in year-over-year revenue, while the auction and online-retailing business has struggled to grow at all, facing formidable opponent Amazon.com (AMZN). Icahn doesn’t see — or perhaps doesn’t want to see — however, that much of PayPal’s growth is the result of the online auction division.
Last quarter, one-third of new PayPal signups were driven by the e-commerce activities at www.ebay.com. Moreover, the company reports that half of the online-auction division’s earnings are being channeled toward PayPal to support its substantial growth rate.
If the two companies are split, eBay won’t be as keen on sending users to a third-party that makes money doing something eBay made a point of bringing in-house a decade ago. And you can be absolutely certain that eBay wouldn’t be writing a check to PayPal every quarter to help it keep growing at its current 19% clip.
So is Carl Icahn truly missing the boat about the symbiotic relationship between PayPal and eBay (and EBAY stock, for that matter), or is he just throwing spaghetti on the wall to see if any of it sticks?
I say it’s the latter.
Remember, Carl Icahn isn’t an investor. He’s an opportunist. He doesn’t care if eBay or PayPal survive past the point he exits his position, and while he might choose to hold both for years to come after any spinoff, he also might choose to sell EBAY stock and the newly created PayPal equities five minutes after all the value is unlocked.
One thing is for sure, though … most small investors won’t know he has shed his eBay or PayPal holdings until after the fact.
Traders looking for firm evidence that Icahn isn’t truly concerned about a company’s longevity (nor is he on the same side of the table as the average investor) only have to look at a comment he made regarding a potential cash distribution he has been hounding Apple for since the middle of last year.
In an interview he gave regarding the Apple matter, Icahn said, “If we lose, we lose, from a financial point of view it might be better for a lot of shareholders if they [Apple] don’t do this.”
If he knows it might not be good for AAPL to let go of so much of its cash, yet he’s pushing for it anyway, it’s possible — even likely — he doesn’t actually think splitting eBay and PayPal is the best outcome for EBAY stock owners either.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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