Carl Icahn Is Missing a Bigger Problem at eBay

How Carl Icahn could have more impact on eBay without a PayPal spinoff.

Jan 25, 2014 at 1:34PM


It's time to turn eBay upside down.

By now, virtually everyone knows eBay (NASDAQ:EBAY) owns PayPal, the web's largest payment solution. The PayPal business is fantastic, having several of the key characteristics that have made Visa, MasterCard, and American Express some of the hottest stocks on the market -- it's a wide-moat, asset-light business that spews cash.

And many people, including Carl Icahn, think investors should be able to own PayPal without eBay. I fall into that camp -- I'd love to own shares of PayPal.

However, when it comes to splitting eBay and PayPal to enrich shareholders, I believe we're missing the forest for the trees.

Who's protecting shareholders?
Whether or not eBay and PayPal should sit under the same corporate umbrella is moot, really. The long-term investor should worry not about a one-time post-spinoff pop, but the business's ability to reward shareholders with profits, and a higher stock price over decades.


Carl, you're missing the real problem. Source:

What really matters is how shareholders haven't seen the rewards of eBay's success. In the full year 2013, eBay generated free cash flow of roughly $3.75 billion. This is actual cash -- dollars and cents -- that could be paid out to shareholders. In a world where most dot-coms are mere start-ups losing cash, eBay is a money-making machine.

Unfortunately, eBay shareholders aren't the first priority. The company doesn't pay a dividend, but it did spend $1.34 billion to repurchase stock in 2013. Ordinarily, this would be great for shareholders. Share count should go down, earnings per share go up, and each share is worth more of the company than it was before. Fair enough.

Except, this didn't happen. Instead, eBay has merely covered up the cost of its aggressive stock and option programs. eBay started 2013 with 1.319 billion diluted in shares outstanding, and ended with an estimated 1.307 billion shares outstanding. eBay essentially paid $111.83 per share in share count reduction, all the while its shares were available at or around $50. The bulk of share repurchases just covered up compensation.

Perfect data won't be out until the annual report hits the SEC website, but if we were to make a rough graph of the efficiency of eBay's repurchases this year, the estimations would reveal a chart that looks like this:

Corporate doublespeak
Speaking on Carl Icahn's plan for the company and creating shareholder value, eBay CEO John Donahoe said the following on the latest conference call:

"Where we disagree is how to best get there. Now, where we probably also agree is that we're undervalued, and our board, by approving a $5 billion share repurchase authorization, gives us the flexibility that if, over time, we opportunistically think we're undervalued, we'll act accordingly."

If John Donahoe truly believed eBay were undervalued, the single best thing he could do is stop issuing "undervalued" shares to employees. Pay employees with cash. Reward them richly when the business performs well, and recruit top talent.

But don't tell shareholders the stock is undervalued while handing out new shares to insiders and employees. And certainly don't talk about valuation when, adjusting for repurchases, eBay is trading at 30 times free cash flow. eBay is a great business, but even the best businesses have to outgrow their share count. At eBay, that's no easy task.

Here's our top pick for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends eBay, MasterCard, and Visa. The Motley Fool owns shares of eBay, MasterCard, and Visa. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers