If eBay separates PayPal, will it really unlock value?

If eBay separates paypal will it really unlock value? No, Commerce and Payments work hand in hand. We have seen it in the case of Starbucks and Uber and this is true even in the case of ebay/paypal. To own the consumer consumer experience and integrate payments in it.

Billionaire investor Carl Icahn, who owns 2.15% of eBay, had submitted a non-binding proposal to spin off PayPal into a separately traded public company. He also nominated two of his employees for election to eBay's board. eBay is not paying heed to Icahn’s proposal, but some analysts are optimistic that there’s a value proposition available in discussing a PayPal spin off.

eBay feels that company’s together (eBay and PayPal) best serves its shareholders. PayPal is the fastest growing part of the business and is also helping eBay to rise. PayPal drives commerce innovation in payments at global scale, creating value for eBay’s consumers, merchants and shareholders. The board of director of eBay has given 5 reasons why Paypal and eBay are better together.

  • PayPal Grows Faster Because of eBay
  • eBay Accelerates the Success of PayPal
  • Data Sharing Leads to More Profitable Growth
  • eBay Inc. Provides Efficient Capital for PayPal
  • Commerce and Payments are Converging

Source: eBay Inc. Issues Letter to Shareholders

Reid Hoffman of LinkedIn who was SVP at PayPal when eBay PayPal deal happened said:
From Mr. Hoffman’s post:
'While PayPal is no longer a start-up, it still has massive growth prospects. But to someone who isn't investing in the long term, it’s just a cash cow that’s ready to be slaughtered.
That’s why Carl Icahn is churning out letters to shareholders so fast he actually rechristened ex-PayPal COO and Yammer founder David Sacks as David Yammer in his first missive. It’s hard to imagine he could have a coherent long-term plan given that his due diligence doesn't extend to surnames. (It’s since been corrected.)
Icahn is determined to manufacture consent for a spin-off, then a sale, so he can make a quick profit on that PayPal premium.If you believe that it takes more than a few caustic letters to shareholders and a quick trade to deliver compounding returns to investors over time, Icahn’s argument loses much of its zing.

From the shareholders point of view, in the past five years PayPal and eBay have generated a 441% increase in share price for eBay’s investors, significantly outpacing NASDAQ and the S&P. In the three-year period 2010-2013, PayPal's mobile payments volume increased 36 times. Today, eBay is a clear leader, with eBay reaching $22 billion and PayPal hitting $27 billion in mobile commerce volume in 2013. The boards of directors of eBay believe that PayPal and eBay together is the best path to creating sustainable shareholder value in the future. In today's competitive environment, the advantages of PayPal and eBay together are more important than ever. Not only eBay, a large section of analysts feel PayPal and eBay are better off together. In the next few years e-commerce is expected to grow at phenomenal pace. If Paypal is separated from eBay at this juncture this would deeply impact eBay as payment and commerce goes hand in hand in today’s world.'

So well said. But a section of analysts feel that spin off of Paypal will create a win-win situation for both the companies. When compared to other e-commerce companies (such as Amazon) and financial services companies (such as Visa and MasterCard), eBay has trailed its peers in both valuation and performance over all relevant time periods. So a spin off might result in unlocking of value. Secondly, eBay and PayPal would benefit tremendously with independent management teams focused only on making the best strategic decisions for their respective business. Thirdly, PayPal would be more able to pursue potential strategic partnerships with other industry leaders, such as Visa, MasterCard, Google, Face book, Alibaba, etc., that could solidify PayPal’s long-term relevance.

However we believe that commerce and payments always work hand in hand and all such successful ideas involve owning the consumer experience, and integrating payment in it. The two companies have built a synergy needed between the payment and commerce players to offer a winner solution to the end consumer. It won’t be easy for them to forge strategic partnerships with the same synergy.

Analysts who are in favor of Paypal spin off feel those significant synergies which must exist between a payment and a commerce firm can be maintained through a contractual business relationship consummated before an IPO and do not actually require eBay owning 100% of PayPal.

However, eBay is desperately trying to stop Paypal spin off and is trying to establish the fact that taking them apart would destroy value by reducing their considerable synergies, which cannot be easily replaced by arm's length commercial agreements. eBay has also asked shareholders to veto Icahn's PayPal spin-off proposal. On 13th May, 2014 in the Annual Meeting of stockholders of eBay it will be interesting to watch whether Icahn gets the last laugh.