The season has changed from summer to fall, but hardly anyone noticed. As far as everyone is concerned, the day that the world changed was September 11. I wrote last week about some of the effects that that day will have on the stocks in our portfolio. Today I'll follow up with some observations about eBay (Nasdaq: EBAY), a company that the market and we continue to look to for good news and hope in the future.
The immediate future
Sales at eBay undoubtedly dropped in the wake of the attack. Auctions set to close in that week must have drawn less attention from users, whose attention couldn't be taken from ongoing news coverage. eBay has stepped up to contribute $1 million to the September 11th Fund. It has also launched "Auction for America," which seeks to raise $100 million in 100 days by giving all the proceeds from designated auction sales to go to the September 11th Fund. This should lower eBay's revenue over the 100 days by another $1 million, if it reaches its target.
Despite these lost sales and charitable donations, eBay has said that it is comfortable with its current revenue and earnings-per-share estimates of $185 million and $0.11 respectively. In reaffirming guidance, eBay has put itself in elite company -- actually, company of one as far as I know -- in the retail and Internet worlds. The market rewarded eBay's self-confidence by only dropping its stock 20% last week, which isn't too bad for a company with a beta of 3.5.
$1 billion burning a hole
Weighing on the stock as much as anything else is eBay's registration of $1 billion worth of shares with the SEC on September 6. It was not a secondary offering just yet; the company did not fix a date or price for the sale, nor did it name an underwriter. It simply said that it might issue stock "from time to time" under the prospectus, promising to provide details in future filings. When it made the filing, its stock fell about 10%, but had recovered by the 10th.
eBay's rationale for the registration is not immediately obvious. The company doesn't appear to need the money. It has $550 million in cash and continues to produce positive free cash flow. So why is it registering to dilute its shares 8.3% -- and precipitating a proportionate, immediate share price drop?
The obvious answer is that it has some big acquisition in mind that could not be accomplished with current cash and registered stock in the company's hands. eBay has been in an acquisitive mood this year, snapping up Korea's Internet Auction Company in February and France's iBazar in May. Who could be next?
The prospectus gave no hints. It said that the company would use the money "for general corporate purposes, including capital expenditures," and that no acquisitions were in the offing -- though it may use the proceeds for them. CEO Meg Whitman also denies any specific intent. "We have no acquisitions in our sights. We see no big dilutive acquisitions on the horizon," she said at the Salomon Smith Barney Technology 2001 conference.
What would you do with $1 billion?
Far be it from me to think that eBay is not being completely forthright, but this strikes me as a bit odd. Capital expenditures? Who are you kidding? The company intended as of August 14 to have $43 million in capital expenditures for the rest of the year. That is well covered by operating cash flow, not to mention the cash it has in the bank. General corporate purposes? What corporate expense costs $1 billion and isn't covered by revenue? The answer is not stock option grants, which are voted upon in proxies. Besides, eBay had 18 million shares in reserve for future option issuance at the end of 2000. That is about how many the company was registering on September 6, at that day's price.
So what could it be? Here's my Top Five Reasons eBay Wants $1 Billion:
5. Flexibility. The prevailing wisdom at the time of the grant was that eBay just wanted to have the ability to make a large acquisition, should one present itself. In fact, it might be nice just to sell some shares at what remains a generous valuation, to "lock in gains," so to speak. eBay doesn't have to dip into the shares if it doesn't want to, but it's nice to have the option. That's a credible possibility.
4. Acquisition. Maybe there is an acquisition in the works. I wouldn't expect Ms. Whitman to say, "Oh, yeah, we're doing it because we're in talks to acquire Yahoo! (Nasdaq: YHOO)." That wouldn't be prudent. But, hey, Yahoo! -- that's intriguing, no? Wouldn't it be a coup, considering that Yahoo!, back when it was a $150 billion company, passed on acquiring eBay? With Yahoo! now at $5 billion and falling, eBay may be able to swoop in and buy it on the cheap. (Actually, I don't think it's cheap yet, but it's getting there.) Or, for real bottom-fishers, there is now another opportunity to buy Priceline.com (Nasdaq: PCLN) for only $550 million. There is some sense in that union.
3. eBayTV. The company has agreed to launch a television show with Columbia Tristar -- no, really, it has -- that "taps into the stories behind the collecting phenomenon." It's not a crazy idea. No one said the words "Antiques Roadshow," but that feature has been a huge hit for PBS, a network not accustomed to huge hits. It has even spawned a drinking game (which the Motley Fool does not endorse, approve of, or condone on its premises).
2. Taunting. A lot has been written lately about how stock underwriters took advantage of Internet companies in the heyday by pricing them far below what they would trade for. The result was that prices soared on the first day of trading, but the money went to the shareholders -- the underwriters and their friends -- rather than the company. eBay itself went through this, watching share prices soar 168% on its opening day, and over 1,200% in its first three months, to about its current price. That was then, when the underwriters held all the cards. Now eBay's in charge, and underwriters are scrambling like mad for the scraps of business there are. With a $1 billion event in its pocket, eBay can lord it over hoards of groveling, salivating analysts. It has to make Ms. Whitman feel like Don Corleone on his daughter's wedding day, and that's a good feeling.
And the number one reason eBay would raise $1 billion...
1. Pez: The Beanie Baby. This is a working Pez Beanie Baby in 100 different styles. eBay will send one to each and every American citizen as a marketing gimmick. It'll be just like the old days of dot-com mania, filling people with a warm sense of nostalgia. What's more, folks can trade them on eBay and collect all 100! It's the perfect scheme!
Brian Lund admits to watching Antiques Roadshow with fascination, but he's more excited about the Pez dispensers. He owns shares of eBay. The Motley Fool is investors writing for investors.