Why Was PayPal Interested in Buying Pinterest?

When it was reported that PayPal (PYPL 1.41%) had been exploring a potential acquisition of social media platform Pinterest (PINS 1.02%), many investors were understandably confused about the motivation. In this Fool Live video clip, recorded on Oct. 21, Fool.com contributors Matt Frankel, Jason Hall, and Toby Bordelon discuss why PayPal may have been interested.

Matt Frankel: Toby, what do you think PayPal is thinking here as a PayPal shareholder?

Toby Bordelon: That's actually an interesting question because when I first saw there was this deal, my reaction was, I'm not sure what the intent is here, I really don't see this making sense. If you look at Pinterest, you look at their platform, you look at the attraction. There's always been the story told, which I think is an accurate one, about how Pinterest users goes to the platform with the intent or if not the intent, at least the willingness and desire to spend money. They're looking for stuff, looking for something might want to put in their projects, looking for ideas. They have this thing, they want to do something and this is going to help them do it. They're prime to spend money.

Therefore, they're better targets for advertising. They're more desirable and they can command higher rates, that's been the theory. That's played out, we've seen that a little bit. The theory with PayPal is that if someone is going to spend money, PayPal's ID as well, they might as well be using our system to spend it. You can see the synergies there, but it's also a separate move. It's not like when you had PayPal and eBay (EBAY 1.09%), eBay was a store. You go buy now, you want to use PayPal, done. Pinterest isn't quite that same thing, there's some more mechanics that have to go into that to attempt to direct the Pinterest users to the PayPal system. It's a little more complicated, I think.

My thoughts went to PayPal's acquisition of Paidy, like the Japanese buy now, pay later company, which they're in the process of doing. You can see how that might work. Pinterest want to do this project, do you want to spend your money now? You can use the Payday. They're expanding their system, they're expanding the universe of ways to spend money. With Pinterest, maybe they're expanding their hooks into potential consumers to bring them over there. That's the thing that makes sense to me.

I almost think it makes more sense from a Pinterest standpoint, from a business standpoint. In other words, Pinterest, do they want to be more than advertising? Are they seeing the saturation in monthly active users, to want to be more than that, who want to expand beyond that revenue-based, maybe a combination with PayPal provides some opportunities to do that. But at least for me, it wasn't something at first glance where I said, "Oh, this is awesome." My first reaction was very much, "I don't know. That share with the four rationales for this."

That's odd because usually I can see it, I can see it pretty clearly when companies do this. I don't know. I guess I can see what management's thinking for PayPal, but I don't know. For me, this is not a home run, like this is not an obvious deal. That's why I think you're seeing the stock down too. I think many PayPal shareholders scratching their heads saying, "What does this do?"

Frankel: Jason, if you we're not a disgruntled Pinterest shareholder today, why do you think they're making this deal?

Jason Hall: Thinking about it from the Pinterest perspective, I really do. We talked about this last night on The Five, we spent a a pretty good bit of time going through it, and I've been thinking about it more this morning. Again, I think with Microsoft (MSFT 0.46%), just not that long ago, was apparently making a push here. At some point, this isn't about companies trying to buy you, maybe it becomes about you trying to be bought. Because at some point, the negotiations continue, and they get leaked, and they come out. It takes two parties to tango.

I wonder if from some people inside Pinterest, they really are starting to think that it's better for the business to be part of something else. From PayPal, Rachel last night was talking about it, and she brought up something of interest talking about social comers. If you think about from PayPal's perspective, having grown so far beyond eBay. They're not even eBay's payment processor anymore. It's so tied to those social transactions at this point, which really fits with something like Pinterest, it really, really does.

I think from PayPal perspective, because you have a Pinterest that generates positive cash flow. This is a business that generated like $300 million in free cash flow over the past year, so maybe there's GAAP losses from time to time, but you're bolting with something on that generates enough free cash flow to cover its business, and that's great, and it can be invested into its business. Then you start thinking about ways to accelerate what we know Pinterest is already trying to do, which is to build more integration for people to use it for the commerce part, not just the advertising part. You want to get those ad revenues, but you have a big company that's using Pinterest for their catalogs, for example.

You don't want them just to pay you to host that or to give you a click through. When you click to go to their social or to go to their e-commerce platform, You wanted to be able to click "Buy" right there in Pinterest if they see something they want to buy. As eBay, you want to be able to participate in the processing of that. There's so many things that seem to make sense so long as they have a light touch. If they PayPal it too much, it loses the attraction, it loses what makes Pinterest so interesting. I think that's the risks there, but I think there's a lot of things about it that makes sense. If they do it the right way.

Frankel: One thing I would point out, I just want to piggyback like two quick points off that. One, Pinterest actually has more active users than PayPal, 454 million worldwide versus 403 million, so it could be a way for PayPal to bring even more users into its ecosystem if it feels like growth potential in its core business is limited. That could be a way to really kick start some growth. Number two, Pinterest is already partnering with some other e-commerce platforms, like Shopify (SHOP 1.26%) in particular.