Carl Icahn vs. eBay: Which Side Should You Take?

The war is getting nastier.

Feb 25, 2014 at 11:21PM

Paypal Ebay

Source: eBay.

The war between Carl Icahn and eBay (NASDAQ:EBAY) is getting nasty. The activist investor is accusing management of failing to spot -- or even deliberately ignoring -- conflicts of interest on the company's board, and he is also insisting on his proposal that eBay should spin off PayPal as soon as possible. Should investors side with Icahn or with eBay´s management?

Conflicts of interest
In his open letter to eBay shareholders, Icahn is quite forward in accusing the company of "multiple lapses" in corporate governance. Icahn believes board members Marc Andreessen and Scott Cook should resign because of conflicts of interest, and he also blames CEO John Donahoe for failing to acknowledge and address the situation.

Icahn accuses venture capitalist Andreessen of "routinely funding competitors while buying companies from eBay and reaping significant personal riches." Among other transactions, the sale of Skype to a private investment group in which Andreessen was an investor seems to be particularly relevant to the discussion.

In 2009, a group of investors in which Andreessen was included purchased a 70% of Skype from eBay for a valuation $2.75 billion, slightly less than what eBay had paid four years earlier. The communications platform was then sold to Microsoft 18 months later for $8.5 billion, which means that eBay left a lot of money in the table.

In its response to Icahn, eBay said Skype had "limited synergies" with the rest of the company's business and that Andreessen was recused from all decision-making because of potential conflicts of interest.

Icahn also criticizes the fact that Andreessen invested in Kynetic a year after eBay sold it for a quick gain of more than 100% in paper profits. Besides, according to Icahn, "Andreessen has made investments in, and actively advised, no less than five direct competitors of eBay," including companies in areas like mobile payments and online money management, which compete directly against PayPal.

Scott Cook, meanwhile, is the founder of Intuit (NASDAQ:INTU), which makes most of its money from TurboTax, but also owns a mobile payments platform GoPayment. In addition, eBay is facing a lawsuit from the Department of Justice over an alleged deal between eBay and Intuit to abstain from recruiting each other's employees.

It's a small world
These situations in which different companies -- perhaps even competitors in some areas -- have overlapping directors are quite common in the tech business, and eBay highlights in its response to Icahn's letter the advantages of having venture capitalists and industry experts on the board:

Marc Andreessen and Scott Cook bring extraordinary insight, expertise, and leadership to eBay's board, which is scrupulous in its governance practices and fully transparent with regard to its directors' other affiliations and businesses.

But none of this means investors need to accept the situation. It ultimately comes down to a trade-off between industry knowledge and expertise versus the potential for conflicts of interest.

In this particular case, Icahn doesn't provide new information, but he has a strong point in highlighting these situations, which shareholders need to carefully analyze.

The PayPal spinoff
Icahn is proposing a separation of PayPal and eBay's traditional Marketplace business. The activist investor is probably right when it comes to increasing returns for shareholders in the short term, although that's not necessarily the same as maximizing value creation over the years.

Being such an exciting growth business, PayPal could trade at a considerable valuation premium if there is a spinoff, so investors in eBay could benefit from material short term gains if the company follows that path.

On the other hand, being a part of eBay provides access to a big customer base for PayPal, and it also allows the payments platform to leverage eBay's technology, data, and access to financing by being part of a bigger company with a diversified business model.

A spinoff will probably happen in the future, especially if PayPal continues outgrowing Marketplaces and becoming an increasingly bigger part of eBay. However, competition is quite aggressive in the digital payments business, and being a part of eBay could give PayPal access to valuable resources in the race for dominance in that industry.

PayPal and eBay are stronger together, at least for now.

Bottom line
Carl Icahn hasn't provided much new information regarding potential conflicts of interest when it comes to eBay's board of directors. However, he has a valid point in highlighting some important issues that deserve careful consideration from investors. When it comes to the PayPal spinoff, he's probably right in terms of short-term financial engineering, but that's not the same as long-term value maximization.

Our top stock for 2014
eBay is a solid company. However, 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.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends eBay and Intuit and owns shares of eBay, Intuit, and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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.

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