eBay and Icahn: What You Need to Know

The activist squabble between eBay (NASDAQ: EBAY  ) and Carl Icahn has all the drama and political intrigue of Netflix's "House of Cards." This week, the battle raged and took a substantial new turn as Icahn is no longer a lone wolf in his attack on the company. Whether eBay could have sold Skype directly to Microsoft (NASDAQ: MSFT  ) is yesterday's news. This is proving to be a true test of how the market values long-term vision vs. short-term profits.

More wolves joining the pack?
On March 10, Leon Cooperman joined the fray, saying on CNBC that he has a 2% position in eBay shares and agrees with Icahn that eBay should spin off a part of PayPal. Cooperman prefers to work behind the scenes and will "vote by walking" rather than being vocal in the press. That may be the case, but it was a very visible show of support that may attract other activists to the pack and increases the likelihood of a spinoff.

A good explanation of why PayPal needs to stay with eBay
EBay has taken a play out of Icahn's book and launched a website to provide evidence for its perspective on keeping the two companies as a single entity. Included among the media clips and SEC filings is a very interesting editorial by Reid Hoffman, founder of LinkedIn and former vice president at PayPal. His editorial is lengthy and entertaining but he sums up an argument to keep the two companies together from a business standpoint very concisely. Here are two passages:

Thanks to its mature and lucrative eBay business, PayPal has the ability to keep its margins as low as possible in the areas where it is undertaking its greatest expansion efforts – namely mobile payments and retail payments.

As competition in the payments sector intensifies, profit margins on all payments systems will likely start trending to zero. As that happens, controlling major commerce platforms will become even more important to payments players, because they'll still be able to create value by building valuable ecosystems on top of them.

Hoffman is now with Greylock Partners, which does not appear to be a member of Silverlake's selling group.

Microsoft could have bought Skype two months after Silverlake
With the value of hindsight, there is little doubt that Skype was spun off from eBay at a dramatic discount while Microsoft was interested in purchasing the company. The dealbreaker for Microsoft was a lawsuit filed by the company's founders that was eventually settled only two months after the sale of Skype to the Silverlake selling group. This settlement left the door open for Silverlake to sell the business to Microsoft before the ink on eBay's check dried.

In defense of John Donahoe
Whether there was malfeasance on behalf of the board or eBay's management team is another issue entirely. John Donahoe was trying to manage a global retail business six months after the stock market bottomed in March of 2009, and dinnertime conversation was about bank runs and hoarding gold. Maybe he should be accountable for handicapping the likelihood of Skype settling the lawsuit -- or maybe that responsibility should fall on the shoulders of the crackerjack venture capitalists on the board or the bankers who advised the company at the time.

There might even be one or two eBay or Skype employees that found employment at venture capital firms shortly after the deal closed. Either way, Donahoe is paying for poor relative growth, as the company cut his 2013 salary by 53% over 2012 as a result of missing financial targets. You can argue about the level of his $13.8 million pay package, but at least its tied to performance.

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