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

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.

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