Unless you live under a rock, you know that eBay (NASDAQ:EBAY) announced this week that it would spin off its PayPal business into a separate publicly traded company. What you may not know is that this is a complete reversal of course for a company and CEO that, as recently as March, said they wanted nothing to do with a split, and that both eBay and its payments platform were better together. The question on many investors' minds now is what this means for eBay shareholders.
A war of words
Activist investor Carl Icahn first pressured eBay to split from its PayPal division more than six months ago, saying the businesses would be better served as separate entities. The e-commerce giant retaliated by presenting shareholders with five key reasons why PayPal and eBay were better together. That list included the following arguments: "PayPal grows faster because of eBay, eBay accelerates the success of PayPal, data sharing leads to more profitable growth, eBay provides efficient capital for PayPal, and finally, commerce and payments are converging."
That all sounds great in theory but, as stand-alone companies, both eBay and PayPal would be more flexible and better able to fend off competitive threats in their respective industries. The digital-payments landscape is particularly crowded today, with deep-pocketed rivals such as Apple (NASDAQ:AAPL) coming onto the scene.
The tech titan recently unveiled its iPhone 6 with a built-in Apple Pay feature that enables iPhone users to pay for things at participating retailers such as Panera and Macy's. Apple Pay is set to launch this month, and it could mean serious competition for PayPal in the digital payments space.
As an independent company, PayPal would be more nimble and, therefore, capable of innovating more quickly. Following the separation, which is planned for the second half of 2015, the new PayPal will be led by Dan Schulman, a former top executive of American Express.
Ultimately, this split should permit PayPal to continue growing at a breakneck pace well into the future. The global-payments giant grew revenues last year by an impressive 19%, to $7.2 billion, while total payments volume ballooned as much as 26%, to $203 billion during the same period. These numbers suggest PayPal is more than ready to stand on its own.
Aside from the obvious benefits for PayPal, what does this mean for eBay and its shareholders?
Two quality companies for the price of one
PayPal and eBay are both top dogs in their respective industries -- PayPal with a presence in 203 markets, and eBay, a global commerce leader with 149 million active buyers today. This is a good thing for shareholders heading into the split because the tax-free spinoff means eBay's shareholders will suddenly have stock in two solid publicly traded companies.
Many analysts argue that the spinoff would make eBay an attractive acquisition target because it would be cheaper without the PayPal business woven into its valuation. This is also a plus for shareholders, because a possible takeover of eBay by a larger company would almost certainly boost the stock's share price.
It's also important to point out that eBay and PayPal aren't completely severing ties. The two companies will continue their relationship at "arm's length" through shared services agreements put in place by eBay's current president and CEO John Donahoe. This should allow both companies to continue benefiting from one another, despite operating as separate entities.
All of this is good news for shareholders. At the end of the day, current eBay shareholders are getting a piece of two robust companies. Each should reward them for years to come.