Icahn Is Wrong About Ebay

Billionaire investor Carl Icahn recently proposed that eBay (NASDAQ: eBay) be split up into two parts, spinning off its PayPal business

At first glance, eBay shares were up more than 7% in after market trading, but as people considered to weigh the merits of breaking eBay apart, the stock quickly retraced its large gain. Icahn generally takes an activist role in companies, as he tries to manipulate their businesses in a way to increase shareholder value. Icahn currently owns around 2% of the company, and is fighting to gain two seats on the company's board of directors. eBay CEO John Donahoe stated that "[Management] believes that [eBay's] collection of assets drives more growth and success together, than apart." In response to this, Icahn is threatening with a proxy fight in order to get his way.

Why is eBay better as a whole?
I think that eBay is worth more as a whole than the sum of its parts. Both PayPal and eBay's online selling platform work together to create a harmonious blend of growth, as eBay's marketplace business provides retention, while PayPal offers growth potential for shareholders. Especially when looking at eBay as a company down the road in terms of growth and market dominance, PayPal looks quite attractive to eBay's overall competitive position.

eBay is a classic example of the network effect, as the more people that use eBay's service, the more valuable it becomes. More sellers attract more buyers, and vice versa. This competitive advantage has not only allowed eBay to develop a wide economic moat, but lets the firm continue to widen its moat. Therefore, I believe that not only will eBay continue to pump out high returns on invested capital for years to come, but that these returns will likely gradually increase as the firm continues to steadily gain market share.

PayPal fits into this network effect in a similar way that credit card issuers obtain their network effects. The more people that use PayPal as a means of an online payment service, the more likely merchants are to accept PayPal as a form of payment. Altogether, the synergy of PayPal and eBay's marketplace has allowed for gross margins over 65% for the last 10 years, and returns on invested capital over 10% for the last five years, however it is worth noting that returns on invested capital have bounced around in light of consumer weakness during the recession. 

Let's take a moment to hypothetically picture an eBay that has found itself in a PayPal spinoff scenario, thanks to Mr. Icahn. If PayPal is taken away from eBay, a large part of the growth that investors benefit from in eBay's stock would likely be susceptible to a decline. PayPal provides most of eBay's actual growth, and contributes to the firm's expanding competitive position. It is the network economics of eBay's core marketplace business, however, that both maintains and increases the company's market share.

PayPal fuels growth as it has strong momentum in capturing a larger share of the online, mobile, and offline payment markets. With already 143 million active users around the globe, PayPal is quickly becoming a payment standard for online payment transactions. Without the core business of eBay, PayPal probably wouldn't have a hard time gaining traction as a means of payment, but I strongly believe that the relationship between eBay's core business and PayPal is the best choice for creating shareholder value over the long term. The separation between the two would be almost certain to turn eBay into a sluggard in terms of growth, and this obviously wouldn't bode well with shareholders. 

The Foolish line
At the firm's current valuation, eBay shares definitely dont look cheap at the pricey multiple of 25 times earnings. At the right price though, eBay would certainly appear to be a very lucrative investment. Nonetheless, it is highly unlikely that Icahn's proposal will come through, as the board of directors, founder, and CEO of eBay are all against the PayPal spinoff. This may, however, create an ample amount of volatility for the stock in the near term. Needless to say, after taking into account the benefit that both eBay and PayPal share as a team, it is apparent that the two work together in order to create a union that will likely continue to drive overall growth and enrich shareholder value for many years to come.

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  • Report this Comment On February 12, 2014, at 4:39 PM, InvestmentOracle wrote:

    Great article! I really appreciate the insight and agree that Icahn is wrong in asking for the PayPal spinoff.

  • Report this Comment On February 18, 2014, at 5:25 AM, PhilipCohen wrote:

    Agreed, Icahn is wrong about eBay ...

    Though it pains me terribly …

    Notwithstanding that I have hereto before been a constant vociferous critic of eBay’s chief headless turkey, Johnny Ho, this time I have to concur with him that eBay should never let go of “PreyPal”. As great a fool as he is, Johnny Ho knows that without its existing integrated relationship with the eBay marketplace, the value of the clunky “PreyPal”, as a stand-alone, would be reduced catastrophically (eBay actually generates ~30% of PayPal new users with no customer acquisition costs for PayPal and half of PayPal's profits come from transactions on eBay where “PreyPal” is well integrated); and, worse still, without “PreyPal”, the value of the eBay marketplace would be reduced by some 40% (“PreyPal” currently contributes ~42% of eBay’s profits) …

    I hate to admit it, but for once Johnny Ho has got it right; Carl Icahn does not know what he is talking about and clearly has no understanding of the value of the inextricable and mutually supporting nature of the incestuous relationship between these two clunky, disingenuous, unscrupulous, commercial entities …

    Regardless, none of the above can outweigh the fact that Johnny Ho is otherwise a talentless, destructive, narcissistic sociopath and that under his direction eBay Inc. is ultimately going to finish up at the sewage farm …

    The fact is, notwithstanding the amount of disingenuous noise that constantly emanates from the eBay Dept of Spin, “PreyPal” has little more than one percent (~1.1%) of the world’s total payments business (and much of that is funded via MasterCard/Visa); the “bankcards”, MasterCard and Visa, have ~90% thereof between them and Amex has another ~8%, and MasterCard and Visa have recently launched their own professional mobile/plastic POS/online digital wallets—The clunky PreyPal’s “best before” date is approaching …

    The ugly reality of eBay Inc.:

    eBay's crooked auctions marketplace ... bit(DOT)ly/11F2eas

    eBay Motors (UK sampling): Auction Fraud Galore ... bit(DOT)ly/I2gTEU

    eBay Motors XSS Redirect Scams in Action: video ... bit(DOT)ly/1d46NvE

    eBay/Gumtree / Barclays Bank Motors Scams … bit(DOT)ly/1c9Uwck

    eBay's clunky, unscrupulous "PreyPal" ... bit(DOT)ly/UVXx53

    The ongoing joke of it all ... bit(DOT)ly/YvxFEg

    Fun quotes from the eBay executive suite ... bit(DOT)ly/12xvzyA

    On Facebook ... facebook(DOT)com/groups/formerebaysellers/

    eBay / PayPal / Donahoe: Dead Men Walking ...

  • Report this Comment On February 18, 2014, at 5:25 PM, PhilipCohen wrote:

    eBay’s Johnny Ho on “thinking days” (LinkedIn) …

    http://www.linkedin.com/today/post/article/20130715110232-18...

    This is a “must read” for anyone considering investing in eBay stock; and, just to whet your appetite, a couple of quotes therefrom …

    “I just finished one of my thinking days last month. I filled a white board with my assessment of the external market and how we were doing against our priorities for the first six months of this year. As frequently happens, once I had written everything out in one place, I found it useful to step back and look at things from a holistic perspective. I emerged with new insights and with greater clarity about what’s most important. To remind myself of these insights, I wrote them out, as I always do, into my personal priorities file and now carry this file with me everywhere I go.”—John Donahoe, LinkedIn (15 Jul 2013)

    [Now, seriously, what could one possibly offer in response to this drivel?]

    “Last year, for example, when I took an extended vacation as part of our company’s sabbatical program, I had some pretty transformational thoughts about reconnecting to our company’s purpose and setting ourselves on a good-to-great journey. I came back to work not just rested, but with more clarity and more conviction than I’ve had in years. This allowed me to share these transformational thoughts with our entire company which has re-energized our team and made me a more effective leader.”—John Donahoe, LinkedIn (15 Jul 2013)

    [Phew! More drivel from this talentless, narcissistic sociopath.]

    And this turkey is at the helm of a Fortune 500 company—unbelievable …

  • Report this Comment On February 24, 2014, at 5:07 AM, VRod007 wrote:

    FOOL IS WRONG ABOUT ICAHN!

    eBay has a global monopoly on auction style selling. They use this monopoly to extract as much fees as possible from sellers from each and every transaction. They haven't innovated a single stitch in over a decade. The only innovation, if you call it that, came when they built a mobile/tablet app.

    PayPal was just one of many payment providers that was used for eBay transactions before they bought them. What set PayPal apart from the others was how well-built their website integrated eBay transaction data and made banking easy.

    eBay bought PayPal to monopolize this area and shut out every other payment service, good or bad. eBay never needed PayPal and PayPal never needed eBay. Zero synergy! No more than eBay needed Skype or Skype needed eBay. eBay sold back Skype to original owners who sold to MicroSoft for a four fold profit.

    This partnership has caused eBay to become a stale company riding PayPal's profits. Being stale has rubbed off on PayPal as far as innovation. To this day, neither company needs each other, but independently each would be forced to innovate or get left way behind.

    I really wished that the PayPal "mafia" never sold to eBay. It would probably own the world's entire payment system by now. And I would be that much richer paying less eBay fees and selling more.

    PayPal is the Coca-Cola of online payment processing. Free from it's master, it would be in a great position to provide easy integration into Amazon, Google, Apple and Microsoft. Ichan probably sees this, but I think he's only interested in flipping this property like everything else he's touched, albeit for the better. Like Apple, PayPal needs it's founders touch once again for true innovation and world domination.

    I've been selling on eBay since 1999 and was one of PayPal's first clients. I still sell on eBay and still use PayPal for most every single online and offline purchase I make. BTW, if I can't use my PP debit card online or off, I don't make the purchase, because my banking with them has never been breached in over a decade...Period!

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