In case you hadn't been paying attention, e-commerce powerhouse eBay (NASDAQ:EBAY) and famed activist investor Carl Icahn don't exactly see eye to eye.
After waging similar activist campaigns against other high profile tech companies like Apple and the now-private Dell, Icahn has most recently trained his sights on eBay, more specifically eBay's prized PayPal division.
Icahn, as many others before him, believes that eBay investors would stand to benefit enormously if eBay were to spinoff or divest PayPal. However, where many have failed in this pursuit, Icahn seems particularly well suited to play the role of change agent de jour at eBay given his penchant for a well-publicized boardroom battle.
The latest chapter of this corporate theater is now set to unfold as eBay's proxy statement was released yesterday, setting the stage for what could be the final showdown between Icahn and eBay's management team.
eBay vs. Icahn – Round 3
As you can imagine, Carl Icahn's shadow loomed large over eBay's initial proxy statement. Proxy statement's typically don't make for the most exciting reading as they're largely filled with important, but somewhat dry, corporate minutia like auditor approvals, amending past executive incentive programs, and the like. However with billions of investors' dollars potentially at stake, the eBay proxy statement did feature several interesting parts.
One interesting aside here is that eBay once again nominated embattled board member Scott Cook , the co-founder and current member of the board at Intuit, to serve another one-year term on eBay's board. Mr. Cook has been one of the many negative focal points of Icahn's PR battle against eBay. Specifically, Icahn takes issues with Cook's presence on eBay's board because PayPal and Intuit compete against one another in some business areas. The obvious conflicts of interest that could arise for Cook's presence on eBays board member serve as yet another example of the many corporate governance issues at eBay that Icahn has railed against in the series of public letters he's recently released. However, eBay is sticking with their man here, and hoping that shareholders will do the same.
The case against Icahn
The meat of the eBay v. Icahn battle comes toward the end of eBay's proxy in voting item #6.
eBay starts by conveying in bold lettering its recommendation that shareholders vote against the Icahn plan. Then it recounts Icahn's proposal as it was received, "Shareholders recommend that the Board of Directors and management act expeditiously, consistent with effective tax consideration, to engage an investment banking firm to effectuate a spin-off of eBay's Payments segment into a separately traded public company."
eBay then lays out its argument for why shareholders should reject the Icahn proposal over the next 4 pages. eBay includes the following as rationales for keeping PayPal under its corporate folds:
- eBay and PayPal provide one another with massive network effects. eBay argues that it enabled PayPal greater chances of success with new products it's launched by allowing PayPal to tap into eBay's larger customer base with no customer acquisition cost. As an example, eBay notes the success that its own mobile app provided for PayPal's entry into the mobile payment space. Specifically, sales on eBay's mobile app in 2009 accounted for 80% of PayPal's initial mobile payments. The number has since decreased as PayPal mobile payments have expanded. However, it's clear that eBay consistently funnel business into PayPal's service at zero cost to PayPal.
- eBay and PayPal have grown faster together than they would have apart. This again ties in with the example from the preceding bullet point. PayPal gets lots of customers from eBay without having to spend anything to acquire those customers. Not a bad deal at all for PayPal.
- eBay's greater financial strength helps fund PayPal's growth initiatives. As the larger of the two companies, eBay has often allowed PayPal to tap its own financial resources, which come at a lower cost than external funding.
- PayPal benefits tremendously from eBay's massive data resources, again at now cost. Having free exposure to eBay's transactional data has enabled PayPal to better detect fraudulent transactions, which have enabled PayPal to maintain its industry-low loss rate.
eBay elaborates on a few more particulars as well, but hopefully you get the general implication here. PayPal without questions saves reams of money from not having to pay for access to eBay's massive network of buyers or the data that comes with it.
Not over yet
However, what's less clear to me at least is whether those cost saving translate a large enough benefit to eBay and PayPal when compared to the possible additional premium that the market might place on an independently traded PayPal, even after it incurred those new expenses.
Icahn clearly believes that PayPal would trade at such a massive premium on its own when compared to eBay's current valuation that the juice would indeed be worth the squeeze. As a follow up, Icahn issued another one of his blistering letters yesterday as well with the promise of a much more detailed argument soon as well. eBay didn't specify when exactly it plans to hold its upcoming 2014 shareholder meeting where this vote will finally come to a head, so we're still awaiting a firm date to circle for this eventual showdown.
However, as eBay reiterated in its proxy statement and Carl Icahn with his letter yesterday, both sides appear firmly entrenched in their hugely differing viewpoints. It's not clear how far Icahn plans to go to pursue his PayPal liberation campaign, but with billions of investors dollar potentially hanging in the balance, this is a business drama investors everywhere would do well to watch continue to unfold.