Hedge funds Elliott Management and Starboard Value both have significant stakes in online marketplace eBay (NASDAQ:EBAY), and both have similar ideas about how its management could succeed in unlocking value. For starters, Elliott wants the company to spin off StubHub and its classifieds business -- both of which have proven to be smart acquisitions.
In this segment from MarketFoolery, host Chris Hill and senior analyst Aaron Bush discuss the upsides and potential futures of Stubhub, the degree to which CEO Devin Wenig is suddenly on the hot seat, their thoughts on the company's recently ended holiday season, and more.
A full transcript follows the video.
This video was recorded on Jan. 23, 2019.
Chris Hill: eBay is going to report their fourth-quarter earnings next week. But yesterday, shares of eBay were up 6% on, well, activist investors looking to make some changes. And it's not just one, it's two. Yesterday, the catalyst was Elliott Management coming out with this letter. Elliott Management owns about 4% of eBay. They came out with this letter saying, "Hey, we'd like to see some changes. Specifically, here are the changes we'd like to see." We'll get to those in a second. Starboard Value, probably a better-known name than Elliott Management -- Starboard Value also has a stake, they revealed that recently -- they're going to come out with their own letter at some point soon.
Pretty interesting timing, planting this flag a week before eBay reports earnings, and putting the CEO on notice. But I'm curious what you thought specifically of the headline changes that Elliott is agitating for -- spinning off the StubHub business and the classifieds business.
Aaron Bush: I'm not surprised to see this happening. I think it could make sense to some degree. What eBay has done incredibly well over the past many years is, they've done a good job pinpointing and buying businesses that are relevant and can scale. If you think about buying PayPal, buying StubHub, those turned out to have some pretty fantastic returns for eBay shareholders. That's great. The problem is that eBay's core marketplace platform isn't the best business to really connect to all of this other stuff. It's hard to build a larger encompassing business that has synergies and is all-inclusive. We saw that with PayPal. It was obvious, PayPal isn't a marketplace. We're starting to see that now. StubHub is a marketplace. The classifieds business is a marketplace. But is eBay really the best connection for those companies to exist?
I think for the classifieds business, maybe it is. It's pretty similar to what eBay does, people buying and selling goods and services. It's mainly international, so there could be something there. That doesn't make as much sense to me.
But on the StubHub side, absolutely. I can totally see StubHub being a separate business, and being separate, being able to unlock value, make deals that they couldn't have otherwise. Honestly, a company like StubHub could do well independently, but it wouldn't surprise me if it got spun out and then was acquired by someone like Amazon or Sirius XM, or even connected to Spotify in some way to help those companies build a more complete music experience, adding live to just streaming.
Hill: You and I were talking before we started taping about the customer experience when you're looking to buy tickets, whether it's to a game or a concert. Essentially, once you've made the decision, "I'm going to go to this thing," then it's all about, "Where am I going to sit?" And that sort of thing. By the time you get to buy the tickets, that's when it clicks in, like, "Oh, my god, how much in fees am I being charged here?" But at that point, you're like, "OK, all right, I'm just going to buy this because I want to go to this thing."
Bush: Yeah, it's not the friendliest for the consumer.
Hill: [laughs] No!
Bush: But it's a pretty great business to be invested in. It tends to generate lots of cash, which can then be either just delivered straight back to investors in dividends or share repurchases, or used like we see in Live Nation, which owns Ticketmaster, they continue to make lots of new deals that strengthen their ecosystem. I could totally see someone wanting StubHub for that great business and being able to use it to strengthen a music ecosystem. And that's not going to be eBay. It makes no sense why that would be eBay. So, I can totally buy why they'd want to spin out StubHub. That would be about a $4 billion business.
Hill: I think back to a few weeks ago, when we were here in the studio, we were doing Motley Fool Money, first episode of 2019, sort of our preview of the year. One of the things we talked about was CEOs to watch, whether they are on the hot seat or just set up for an interesting year. None of us mentioned Devin Wenig, the CEO at eBay. But I think the next couple of weeks are going to be really interesting for him. He took over as CEO of eBay back in July of 2015 when the PayPal spin-off occurred. You think back to then, shares of eBay were around $26 a share. Today, they're around $33. And that alone isn't enough to necessarily get a CEO fired, but I think the combination of the attention being paid because of the activist investors coming in, being very specific about unlocking value, I really think this conference call next week is going to be interesting.
Among other things, they're coming out of the holiday quarter. And I saw a lot of eBay commercials on television. And personally, as a longtime shareholder of eBay, I'm curious to see, not just what they put up in terms of revenue and profits, but what was their marketing spend? What did that look like? It wouldn't surprise me at all if they came out next week and it was, "Oh, yeah, we ended up shooting for the moon in terms of trying to bring in revenue, and because of that, we spent a ton more on advertising than we normally do."
Bush: Right. I think it'll be interesting to see how open-minded he is to changes being made. If he is stubborn...the previous CEO was also stubborn when it came to spinning off PayPal, and that didn't exactly work out. I think what he should do is be open-minded and recognize that some of these businesses could have value elsewhere. His legacy could come from how great of a dealmaker he is. Even if you think about, you spin out StubHub, maybe you spin off the classifieds, that leaves a much smaller eBay. And what do you do with that? Does that become acquired? Do you make other partnerships with that? I think that if the snowball starts rolling, it'll start accelerating. Maybe nothing happens, but if something even small happens, it could trigger other things afterwards. Those are legacy-making decisions on his part.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of AMZN, LYV, and PYPL. Chris Hill owns shares of AMZN, eBay, and PYPL. The Motley Fool owns shares of and recommends AMZN, LYV, and PYPL. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.