The war between Carl Icahn and eBay (NASDAQ:EBAY) is getting nasty. The activist investor is accusing management of failing to spot -- or even deliberately ignoring -- conflicts of interest on the company's board, and he is also insisting on his proposal that eBay should spin off PayPal as soon as possible. Should investors side with Icahn or with eBay´s management?
Conflicts of interest
In his open letter to eBay shareholders, Icahn is quite forward in accusing the company of "multiple lapses" in corporate governance. Icahn believes board members Marc Andreessen and Scott Cook should resign because of conflicts of interest, and he also blames CEO John Donahoe for failing to acknowledge and address the situation.
Icahn accuses venture capitalist Andreessen of "routinely funding competitors while buying companies from eBay and reaping significant personal riches." Among other transactions, the sale of Skype to a private investment group in which Andreessen was an investor seems to be particularly relevant to the discussion.
In 2009, a group of investors in which Andreessen was included purchased a 70% of Skype from eBay for a valuation $2.75 billion, slightly less than what eBay had paid four years earlier. The communications platform was then sold to Microsoft 18 months later for $8.5 billion, which means that eBay left a lot of money in the table.
In its response to Icahn, eBay said Skype had "limited synergies" with the rest of the company's business and that Andreessen was recused from all decision-making because of potential conflicts of interest.
Icahn also criticizes the fact that Andreessen invested in Kynetic a year after eBay sold it for a quick gain of more than 100% in paper profits. Besides, according to Icahn, "Andreessen has made investments in, and actively advised, no less than five direct competitors of eBay," including companies in areas like mobile payments and online money management, which compete directly against PayPal.
Scott Cook, meanwhile, is the founder of Intuit (NASDAQ:INTU), which makes most of its money from TurboTax, but also owns a mobile payments platform GoPayment. In addition, eBay is facing a lawsuit from the Department of Justice over an alleged deal between eBay and Intuit to abstain from recruiting each other's employees.
It's a small world
These situations in which different companies -- perhaps even competitors in some areas -- have overlapping directors are quite common in the tech business, and eBay highlights in its response to Icahn's letter the advantages of having venture capitalists and industry experts on the board:
Marc Andreessen and Scott Cook bring extraordinary insight, expertise, and leadership to eBay's board, which is scrupulous in its governance practices and fully transparent with regard to its directors' other affiliations and businesses.
But none of this means investors need to accept the situation. It ultimately comes down to a trade-off between industry knowledge and expertise versus the potential for conflicts of interest.
In this particular case, Icahn doesn't provide new information, but he has a strong point in highlighting these situations, which shareholders need to carefully analyze.
The PayPal spinoff
Icahn is proposing a separation of PayPal and eBay's traditional Marketplace business. The activist investor is probably right when it comes to increasing returns for shareholders in the short term, although that's not necessarily the same as maximizing value creation over the years.
Being such an exciting growth business, PayPal could trade at a considerable valuation premium if there is a spinoff, so investors in eBay could benefit from material short term gains if the company follows that path.
On the other hand, being a part of eBay provides access to a big customer base for PayPal, and it also allows the payments platform to leverage eBay's technology, data, and access to financing by being part of a bigger company with a diversified business model.
A spinoff will probably happen in the future, especially if PayPal continues outgrowing Marketplaces and becoming an increasingly bigger part of eBay. However, competition is quite aggressive in the digital payments business, and being a part of eBay could give PayPal access to valuable resources in the race for dominance in that industry.
PayPal and eBay are stronger together, at least for now.
Carl Icahn hasn't provided much new information regarding potential conflicts of interest when it comes to eBay's board of directors. However, he has a valid point in highlighting some important issues that deserve careful consideration from investors. When it comes to the PayPal spinoff, he's probably right in terms of short-term financial engineering, but that's not the same as long-term value maximization.