Remember when PayPal Holdings (PYPL 1.57%) was reportedly interested in acquiring Pinterest (PINS 1.37%) late last year? Good thing that didn't work out. The two stocks have both tanked since then during the bear market of 2022, with each down about 70% from all-time highs reached during the previous summer. At the time, Pinterest was valued at upwards of $40 billion, so PayPal would have ended up egregiously overpaying given everything that has ensued since news of a potential deal first leaked. Pinterest is now just a $15 billion company.

However, both stocks rallied following second-quarter 2022 earnings after it was revealed that private equity firm Elliott Management has taken a large equity stake in PayPal and Pinterest. Will a merger deal be back on the table soon?

Don't rule some sort of deal out

Elliott Management is no stranger to mergers and acquisitions. For example, the private-equity company made headlines back in 2019 when it took credit for getting AT&T to cut spending to refocus on its mobile network. It offloaded shares in late 2020, only to buy again in early 2021 ahead of AT&T formalizing a merger between its Time Warner subsidiary with Discovery -- a business now called Warner Bros Discovery. Elliott has made some coin off these deals, but neither stock has fared well for buy-and-hold shareholders.

T Chart

Data by YCharts.

Even closer to a PayPal-Pinterest combination is Elliott's work with eBay. In early 2019, Elliott Management sent a letter to the e-commerce marketplace recommending a refocus on its core business. Included in eBay's overhaul in recent years has been a parting of ways with none other than PayPal (announced in 2020), giving eBay room to work on its own digital payments system instead (via a partnership with Adyen). Elliott made a tidy profit on eBay thanks to these moves. There are other examples of Elliott's activist activity in recent years, to mixed results.

What will Elliott's role be in this go-around with PayPal and Pinterest? PayPal is highly reliant on e-commerce activity for its digital payments apps, and getting more online shopping activity into its pipeline will be key to its continued expansion. Its revenue is expected to increase a modest 10% this year to about $27.85 billion.  

As for Pinterest, it's no secret the company is trying to become a much more robust e-commerce platform rather than a simple social media and visual search brand. Increasing functionality for merchants with advertising and video content tools will be key, but adding a way to sell products and collect payment directly on Pinterest could be part of the plan as well. Perhaps some sort of partnership with PayPal will be forthcoming, and new CEO Bill Ready (a former PayPal executive) no doubt has some ideas too.

Pinterest currently expects third-quarter 2022 revenue to increase by just a mid-single-digit percentage compared to 2021.

How friendly would M&A be to shareholders?

Mega-mergers, especially those between companies that don't have a lot in common, can get messy. If Elliott pushes for some sort of deal between Pinterest and PayPal, I'd expect it to be one that is beneficial to both stocks in the short term. That would give the private-equity firm time to offload one (or both) stocks for a quick profit and then move its capital on to greener pastures.

Best-case scenario, though, is for PayPal and Pinterest to forge some sort of partnership that would create value for shareholders of both companies over time. An outright acquisition of Pinterest by PayPal could work. PayPal had $15.6 billion in cash and equivalents and $10.6 billion in debt as of the end of June, so a deal could be made by using a combination of cash and new debt, or cash and new PayPal stock. But merging the two could get dicey, and it would take years to fully realize any value from combining the two businesses. Based on recent history, owning positions for many years doesn't appear to be Elliott Management's style when it comes to its activist investor habits.  

Given the heightened uncertainty right now, I'm not so sure PayPal is such a great long-term buy-and-hold anymore if it decides to shell out cash and stock to acquire Pinterest. I'm inclined to say PayPal would be better off as is right now. It's working through the slowdown from the early pandemic e-commerce shopping boom, and it's still highly profitable. The company has generated free-cash-flow margins of nearly 20% over the last year.  

On the other hand, Pinterest is smaller, and its problems could thus be easier to fix to get revenue back in growth mode. Pinterest also boasts an even higher free-cash flow-margin of 25%. Perhaps as part of PayPal, it could generate even higher rates of cash, but that path is fraught with uncertainty. Either way, Pinterest and PayPal shareholders are now in an interesting wait-and-see scenario. Stay tuned for any announced proposals from Elliott Management on a path forward for these two beleaguered stocks.