If you thought Carl Icahn was done trying to convince eBay (EBAY +0.69%) to spin off PayPal, think again. Despite Icahn backing down from his PayPal-centric activist investor stance just more than four months ago, tech news site The Information reports eBay is now mulling whether to split from PayPal as early as 2015. At least that's what two people familiar with the situation claim eBay has been telling prospective PayPal CEO recruits.
And it makes sense, as such a move would safely qualify as crucial information for any applicant to know before taking the job. For reference, eBay has been searching for a replacement to lead PayPal since segment president David Marcus unexpectedly announced he was leaving to join Facebook in June. Shares of eBay jumped nearly 5% on Wednesday following the report.
Surprise?
Of course, this shouldn't come as a complete shock. After all, when Icahn withdrew his request in April -- which included a proposal to put two nominees on eBay's board -- eBay, in return, followed his suggestion to appoint a new independent director in former chairman and CEO of AT&T, David Dorman. Dorman is also a founding partner of tech investment firm Centerview Capital Technology.
At the same time, Icahn both maintained his assertion that PayPal could create greater shareholder value as an independent business, and stated he would continue to pursue confidential talks on the topic with eBay.
This auction's not over yet
However, a PayPal spinoff is hardly guaranteed. Consider the words of eBay CEO John Donahoe during the company's most recent quarterly conference call last month:
The proxy fight in Q1 gave us the chance to engage with our largest shareholders and hear what's most important to them. They told us three things. First, they see significant value creation in our plans and want us to execute. Second, they want us to aggressively pursue our announced $5 billion share buyback. And third, they believe that synergies make eBay and PayPal better together for now, but they want us to continue to be open-minded to alternatives. We agree with all three points. [emphasis mine]
So -- "for now" -- why is eBay better off with PayPal firmly tucked under its wing? First, PayPal's business has regularly outperformed that of its owner, as it generated double-digit year-over-year customer growth last quarter to surpass more than 150 million active registered accounts. That translated to an impressive 33% jump in PayPal's merchant services total payment volume, and 20% growth in net revenue, to $1.95 billion. Should PayPal's growth continue, it won't be long before it accounts for more than half of eBay's total revenue, which stood at roughly $4.37 billion last quarter.
eBay can stand alone, but ...
That's also not to say that eBay isn't able to grow by itself. Last quarter, eBay Marketplaces managed to post year-over-year revenue growth of 9%, to $2.17 billion, on gross merchandise volume growth of 12%. That's nothing to scoff at, especially when you consider eBay's quarter was hampered by not only unfavorable search engine optimization updates from Google, but also a huge cyber attack, which led to a global password reset for all of its users.
In the end, eBay may well resume its own outperformance once it recovers from these setbacks. But investors simply can't underplay the important role PayPal has served in buoying its auction-oriented parent.
Would PayPal command a higher valuation on its own? Probably, as that's often the case when faster-growing companion businesses are paired as part of a larger conglomerate. But for now, I wouldn't blame eBay for wanting to hang on tightly to this prized asset.
