3 Reasons an eBay-PayPal Spinoff Doesn't Make Sense

Activist investor Carl Icahn calls for eBay to spin off its Paypal business, but the move could do more harm than good.

Jan 24, 2014 at 11:00AM

Shares of eBay (NASDAQ:EBAY) jumped this week after the company reported fiscal fourth-quarter and full-year earnings after the bell on Wednesday. However, the move had more to do with activist investor Carl Icahn's recent actions than eBay's quarterly and annual results.


Source: eBay.

During its earnings call yesterday, eBay revealed that Carl Icahn has taken up a 0.82% stake in the marketplaces and payments company with the intention of spinning off its PayPal business. Specifically, he submitted what is known as a non-binding proposal, which would let eBay's shareholders vote on the idea of spinning off PayPal into its own business. In his not-so-subtle style, Mr. Icahn also nominated two of his employees to eBay's board. 

Before we get ahead of ourselves, here are three key reasons PayPal and eBay are better together than apart.

To split or not to split
Purchasing PayPal for $1.5 billion in 2002 is one of the smartest business decisions eBay has made in the past decade. Since that time, eBay has grown its PayPal unit into a global payments powerhouse with a record $27 billion in annual sales volume in fiscal 2013. To be clear, I don't like the buzzword synergies, but PayPal does, indeed, owe much of its current success to the eBay platform.

After all, 30% of PayPal's new customers now come from eBay. A whopping 5.2 million people signed up with PayPal in its latest quarter. On top of this, half of PayPal's total mobile volume in 2013 was generated through eBay, as were nearly 50% of its profits. Additionally, eBay added an impressive 4.6 million active users during the fourth quarter. That means PayPal now has access to a global customer base of 128 million active users today as part of the eBay family. 

Sure, Icahn can argue that eBay's marketplaces business isn't growing as quickly as its PayPal segment. PayPal's revenue increased 19% in fiscal 2013, compared to a 12% gain in eBay's marketplaces unit. However, that's hardly justification enough to separate the two.

From Icahn to I-can't
Separately, it will take more than a 0.82% position in eBay for Mr. Icahn to convince the company's board that a spinoff is necessary. eBay's CEO, John Donahoe hasn't been shy about confronting the issue. In a blog entry on its PayPal site today, he said, "We continue to believe that shareholders and customers are best served by keeping PayPal and eBay together." 

Nevertheless, having less than a 1% ownership in the stock isn't a huge stake for someone like Carl Icahn. Aside from his highly publicized $3 billion investment in Apple, Icahn bought a 10% stake in video streaming service Netflix (NASDAQ:NFLX) in 2012 and Dell in 2013. Initially, when Icahn acquired shares of Netflix, it was because he was pressuring the company to put itself up for sale. 

Similar to eBay's stance today, Netflix CEO Reed Hastings pushed back. Just days after Icahn first announced his 2012 stake in Netflix, the company's board adopted a "poison pill" to stop him from buying more shares. Fortunately, eBay hasn't needed to take such action, because Mr. Icahn's position in the company remains small compared to its 1.3 billion shares outstanding. 

In the end, Icahn backed down from his stance on Netflix and quietly sold shares -- for an $800 million profit nonetheless. Still, I suspect we'll see a similar outcome with his position in eBay. It wouldn't be the first time Icahn has gotten pushy with a company and lost.

If it ain't broke...
In short, eBay and PayPal were made for each other. Separating them would leave eBay's marketplace business without its most valuable asset, and PayPal without a source of low-cost capital to fund future growth. That's why I'm on team Donahoe in arguing for a future in which PayPal and eBay work together to create shareholder value.

How you can profit 
Find out how to profit on business analysis like this? The key is to learn how to turn business insights into portfolio gold by taking your first steps as an investor. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you what you need to get started, and even gives you access to some stocks to buy first. Click here to get your copy today -- it's absolutely free.


Fool contributor Tamara Rutter owns shares of eBay and Netflix. The Motley Fool recommends eBay and Netflix. The Motley Fool owns shares of eBay and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information