On New Years Day this year, Carl Icahn, one of Wall Street's most famed activist investors, owned exactly zero shares of eBay Inc. (NASDAQ:EBAY). But by the end of June, the company had become his sixth-largest holding. Icahn Enterprise's most recent 13F filing shows that its stake in eBay is worth more than $1.5 billion.
Although investors need to think for themselves, it's at least worth kicking the tires on Icahn's latest investment. Could putting your money into eBay be the right move for you?
A relationship that started with harsh words
To understand the relationship between Icahn and eBay, we need to rewind to the first quarter of this year, when Icahn bought 27.8 million shares of eBay. At the time, he believed that eBay needed to be split, with the traditional marketplace continuing as is, and the company's lucrative PayPal system being spun off.
Icahn didn't mince his words when he described the sort of shake-up he wanted to take place at the company. He had harsh words for the company's board members -- who he thought were skirting their fiduciary responsibility to shareholders -- and CEO John Donahue. "The CEO seems to be completely asleep or, even worse, either naive or willfully blind to these grave lapses of accountability and stockholder value destruction," Icahn wrote in an open shareholder letter regarding eBay.
Indeed, eBay's online marketplace and its PayPal service have very different growth trajectories:
According to Icahn's letter to eBay shareholders, the businesses were worth more separate than they were together, because they were "shrouded by a conglomerate discount the market has afforded eBay."
Icahn was pushing to have two board members representing his interests elected, and for a while, it looked like the company was headed toward an ugly proxy fight.
A resolution...for now
Those fears, however, never materialized. In April, the company and Icahn announced that a truce had been reached. Icahn was able to get one board member of his own choosing to join the board, and he stopped waging his public battle for the company to spin off PayPal.
Icahn made it clear, however, that he still thinks splitting the two companies up makes sense. "I continue to believe that eBay would benefit from the separation of PayPal at some point in the near future and intend to continue to press my case through confidential discussions with the company," Icahn said in a statement.
In a move that was likely related, eBay also agreed to drastically boost its share repurchase agreements.
This has led to a 4.1% reduction in shares outstanding, which creates quick and easy value for shareholders.
What you should make of Icahn's purchase
During the second quarter of this year, Icahn's purchase of eBay stock was understandably lower than it was during the first quarter. He purchased 3 million shares to increase his total holdings by about 11% to 30.8 million shares.
The move appears to have been made well after the threat of a proxy fight had dissipated. That's important, because it signifies that Icahn still thinks eBay stock is worth owning, even if a spin-off of PayPal remains elusive.
For investors looking to buy shares of a solid business (i.e., the marketplace) with a quickly growing subsidiary (i.e., PayPal), it's worth looking into eBay. Shares currently trade for 19 times earnings. That might sound expensive, but it's about in line with the S&P 500, and I would argue that eBay has more growth potential than the average S&P 500 company.