What happened

Shares of online auctioneer eBay (NASDAQ:EBAY) have jumped today, up by 7% as of noon EST, after activist investor Elliott Management took a $1.4 billion stake in the company and released an open letter to the board of directors advocating for changes to increase shareholder value. Starboard Value, another activist hedge fund, has reportedly also taken an undisclosed stake in the company.

So what

Elliott's stake represents 4% of eBay. It believes eBay can "create significant value" if the company were to adopt the five-step plan that Elliott is recommending. For starters, Elliott recommends that eBay sell off StubHub, which it acquired in 2007, as well as its portfolio of Classifieds properties. That would allow management to focus on "revitalizing" the core marketplace business. eBay also needs to improve operational efficiency to expand margins, according to Elliott, and continue returning "substantial" capital to shareholders. Finally, the company needs to make sure it has the right leaders to implement the changes.

eBay campus in San Jose

Image source: eBay.

Now what

Elliott believes the stock could be worth $55 to $63 by 2020, substantially higher than current levels of around $33, if eBay were to pursue Elliott's recommendations. Shares have been underperforming compared to peers and the broader market for "a prolonged period of time," Elliott argues.

Selling the Classifieds group and StubHub could bring in a total of $11.5 billion to $16.5 billion combined, according to Elliott's valuation estimates of the divisions. eBay has ramped up spending on advertising and product development at rates that exceed revenue growth since 2013, pinching operating margins. Elliott is calling for more cost discipline, as that spending has failed to deliver revenue growth.

Generally speaking, having a prominent and influential activist investor agitating for change that could create shareholder value is a good thing for investors. eBay says it "will carefully review and evaluate Elliott's proposals" and looks forward to engaging with the fund.

Check out the latest eBay earnings call transcript.