Was Carl Icahn Right About the PayPal Spinoff? (EBAY)

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OK, maybe Carl Icahn knew best after all.

PayPal spinoffOn Thursday, shares of eBay (EBAY) jumped following rumors that a PayPal spinoff might be in the works. The issue had seemingly died in April when the activist investor — who owns 2.5% of all EBAY stocksettled for a couple of seats on the board of directors instead of forcing the company to split into two entities.

Now, however, Icahn may be proverbially having his cake and eating it too.

The resurfaced idea of a PayPal spinoff was first reported by news website The Information, which says the possibility was confirmed by two credible sources.

Moving forward with the PayPal spinoff still doesn’t necessarily mean it’s the best outcome for those who own EBAY stock for the long-haul, however.

What is PayPal really worth to eBay, now and later?

The PayPal Spinoff is Back

As a refresher, this saga actually got started back in January when Carl Icahn first floated the idea … after he had acquired approximately 0.8% of EBAY stock and began jockeying for a couple seats on the board.

The ultimate goal was clear, though — spin off the online and mobile payments division. The two board directors were simply a means to an end.

It was a public discussion that started out friendly enough. Icahn’s first comments on the matter were a fairly benign “It’s a no brainer that PayPal should be spun off.” eBay disagreed, and decided to forgo a PayPal spinoff. CEO John Donahoe stated:

“Based on what we see today, we continue to believe that the company, our customers and our shareholders are best served by keeping PayPal and eBay together.”

The jabs began to get nastier after that, eventually leading Icahn to comment:

“I believe that all stockholders must consider whether Donahoe is either incompetent or negligent or, perhaps even worse, was simply taking the easy path of bowing to the wishes of a respected and powerful board member.”

There aren’t too many ways to interpret the comment other than nasty, harsh and personal. But with eBay entrenched in its stance (perhaps even more so because of Icahn’s jabs), the activist investor finally backed off in April, and the matter faded away.

Or perhaps not.

While Carl Icahn doesn’t appear overtly behind the revival of the PayPal spinoff push, one has to wonder if he’s still somehow pulling the strings; at the very least, he planted the seeds.

In the same vein, investors could understandably wonder if Donahoe simply didn’t want to appear as if he was kowtowing to Icahn’s whims. By waiting four months after Icahn backed off, the PayPal spinoff looks more like Donahoe’s baby.

For EBAY Stock Owners, It’s Time to Face Facts

Regardless of how it all came to be (again), the key issue at this time to anyone with a stake in EBAY stock isn’t whether the spinoff is going to happen, but what the PayPal spinoff means to the people sitting on both sides of the table.

Last year, PayPal generated 41% of eBay’s $16 billion in total revenue. The integral link between the two divisions is clear, of course — the online auction side of the business arranges for the goods to be bought and sold, while the payments side of the business facilitates the financial transactions. Neither would be where it is today without the other.

The two divisions aren’t walking hand-in-hand though.

Last quarter, PayPal’s revenue was up 20%, vs. only a 12% gain for the Marketplace division … the e-commerce platform. Thing is, the second quarter was a microcosm of an outpaced growth trend the PayPal division has been enjoying for a few years, as it grows its payment reach beyond the confines of www.ebay.com. This week’s unveiling of One Touch is yet another way in which PayPal is on pace to outgrow eBay’s e-commerce division.

Indeed, the time for the baby bird to leave the nest might well be now, on the cusp of a mobile payment explosion. PayPal has a wide lead in the space right now, but nothing is guaranteed — especially with big tech names like Google (GOOG) and Apple (AAPL) eyeballing the space. Letting PayPal loose might be the only real way to let it thrive.

But why can’t PayPal simply grow under the eBay umbrella?

Win-Win?

It can, theoretically, but the lack of a firewall between it and the e-commerce arm has apparently caused concern for potential PayPal commerce partners. By dividing the two sides of the current company, current eBay vendors (as well as vendors not using eBay) should be less concerned about the potential self-serving interests the two units have with each other.

There’s also concern about a lack of innovation under the eBay umbrella. If PayPal were its own distinct organization and wasn’t worried about oversight from relatively disinterested management, it could be more creative.

Those are only theories, but they’re sound ones. While they’re subject to debate, they’re at least worthy of discussion.

The upside for current and future EBAY stock holders is two-fold. In the near term, odds are strong that PayPal shares would issue at a premium, providing the company and/or shareholders with a solid new stock, or cash, or both. Simultaneously, while the idea hasn’t been tossed around in too many circles, eBay — the e-commerce division of the company — also might find a little more freedom without any shackles it may feel its wearing while PayPal as part of the mix.

Whatever the case, it now appears eBay’s management believes Carl Icahn was right about the PayPal spinoff, and was able to accommodate him without appearing as if they’re just accommodating him.

The market agrees, and for good reason.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/carl-icahn-ebay-paypal-spinoff/.

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