It wasn't the $390 million purchase of Danish classifieds site Den Bla Avis and its auto marketplace sister site BilBasen. The market is happy to see eBay make tactful overseas acquisitions, and these are popular online draws in Denmark. Den Bla Avis is generating more than 120 million monthly page views, with BilBasen attracting 66 million page views a month.
Nor did the layoffs prompt Wall Street's ire. eBay's 1,000-person reduction in its worldwide headcount -- 10% of its workforce -- is a sobering move, but everyone knew that a stagnant eBay had to do something. Even if this is a sharp pin in morale's helium balloon, it's a necessary pop. The cost savings should be material in the long run.
So what murdered the market cap? By default, we're left with the $945 million deal for Bill Me Later.
Bill Me Later or thrill me now
The market is overreacting to the Bill Me Later purchase. It's a good deal. It may even be a great deal. You just have to warm up to the purchase.
Why is the market worried? Well, eBay still hasn't shaken the stigma of overpaying for Skype. Two years after buying the fast-growing voice-chat app, eBay took a $900 million impairment charge -- an admission of guilt on the overspending front. eBay turned heads when it agreed to buy Skype for more than $2.6 billion in 2005. The price proved just too much for an app that -- while popular -- would never fully fit with its namesake marketplace, nor its PayPal payment platform.
In contrast, Bill Me Later fits like a glove. Consumers are increasingly turning to the service, which offers buyers the ability to buy an item without having to whip out a credit card. Shoppers just enter their birth date and the last four numbers of their Social Security number. Bill Me Later then sends out a bill for shoppers to pay on their own terms. It's more than just convenient; in a tricky economic climate where money is hard to come by, it's a godsend.
The real key in this buy -- justifying the premium -- is that Bill Me Later was starting to take off as a viable alternative to PayPal. Online merchants like apparel chain Bluefly (Nasdaq: BFLY ) encourage buyers to use Bill Me Later. Big-ticket retailers like Apple (Nasdaq: AAPL ) and Palm (Nasdaq: PALM ) are also on board. Even service companies like online access provider Earthlink (Nasdaq: ELNK ) are willing merchants. PayPal has had no problem taking on Google's (Nasdaq: GOOG ) Checkout and a laundry list of pretenders in the past, but Bill Me Later was becoming a killer brand in this space. eBay wasn't smart enough to kill it in the crib, but it's never too late to adopt it as a toddler.
Behind the money
This doesn't mean that eBay isn't overpaying for Bill Me Later. In the near term, it's most certainly paying a hefty premium for the company: $945 million in cash and consideration. That's steep for a company that will ring up just $150 million in revenue next year, pricing Bill Me Later at a heavy 6.3 times next year's revenue target. It's far less than Skype's multiple at the time of its purchase, but three times the multiple that eBay itself is fetching (with analysts expecting the company to top $10 billion in revenue).
The high top-line multiple would be forgivable if Bill Me Later offered amazing margins, but it doesn't. eBay expects the purchase to be dilutive until 2011. Next year alone, Bill Me Later will drag projected profitability for all of eBay down by $0.13 a share (or off $0.06 a share on a non-GAAP basis).
That's enough to give investors the heebie-jeebies.
And don't forget the credit crunch. When even LendingTree decides to change its name to Tree.com (Nasdaq: TREE ) , a company with a name like "Bill Me Later" carries some negative connotations in these lender-weary times.
Even with all of that in the mix, I still believe this is a brilliant move by eBay. With its original auction business struggling, it just couldn't afford to watch PayPal get walloped by a spunky player like Bill Me Later.
Besides, since the stock shed more in market cap yesterday than it will spend on all of Bill Me Later, investors today should approach it as a freebie. You'll thank eBay later.
More items in the eBay playbook: