It's time to turn eBay upside down.

By now, virtually everyone knows eBay (NASDAQ:EBAY) owns PayPal, the web's largest payment solution. The PayPal business is fantastic, having several of the key characteristics that have made Visa, MasterCard, and American Express some of the hottest stocks on the market -- it's a wide-moat, asset-light business that spews cash.

And many people, including Carl Icahn, think investors should be able to own PayPal without eBay. I fall into that camp -- I'd love to own shares of PayPal.

However, when it comes to splitting eBay and PayPal to enrich shareholders, I believe we're missing the forest for the trees.

Who's protecting shareholders?
Whether or not eBay and PayPal should sit under the same corporate umbrella is moot, really. The long-term investor should worry not about a one-time post-spinoff pop, but the business's ability to reward shareholders with profits, and a higher stock price over decades.

Carl, you're missing the real problem. Source:

What really matters is how shareholders haven't seen the rewards of eBay's success. In the full year 2013, eBay generated free cash flow of roughly $3.75 billion. This is actual cash -- dollars and cents -- that could be paid out to shareholders. In a world where most dot-coms are mere start-ups losing cash, eBay is a money-making machine.

Unfortunately, eBay shareholders aren't the first priority. The company doesn't pay a dividend, but it did spend $1.34 billion to repurchase stock in 2013. Ordinarily, this would be great for shareholders. Share count should go down, earnings per share go up, and each share is worth more of the company than it was before. Fair enough.

Except, this didn't happen. Instead, eBay has merely covered up the cost of its aggressive stock and option programs. eBay started 2013 with 1.319 billion diluted in shares outstanding, and ended with an estimated 1.307 billion shares outstanding. eBay essentially paid $111.83 per share in share count reduction, all the while its shares were available at or around $50. The bulk of share repurchases just covered up compensation.

Perfect data won't be out until the annual report hits the SEC website, but if we were to make a rough graph of the efficiency of eBay's repurchases this year, the estimations would reveal a chart that looks like this:

Corporate doublespeak
Speaking on Carl Icahn's plan for the company and creating shareholder value, eBay CEO John Donahoe said the following on the latest conference call:

"Where we disagree is how to best get there. Now, where we probably also agree is that we're undervalued, and our board, by approving a $5 billion share repurchase authorization, gives us the flexibility that if, over time, we opportunistically think we're undervalued, we'll act accordingly."

If John Donahoe truly believed eBay were undervalued, the single best thing he could do is stop issuing "undervalued" shares to employees. Pay employees with cash. Reward them richly when the business performs well, and recruit top talent.

But don't tell shareholders the stock is undervalued while handing out new shares to insiders and employees. And certainly don't talk about valuation when, adjusting for repurchases, eBay is trading at 30 times free cash flow. eBay is a great business, but even the best businesses have to outgrow their share count. At eBay, that's no easy task.