eBay (NASDAQ:EBAY) is going through a lot of changes. The online auction house just followed up a solid fourth-quarter earnings report with major layoffs, adding a chair to its board of directors, and mulling over the spin-off of yet another major business unit.
The reason for the shake-up? Two words: Carl Icahn.
That's right -- eBay's seemingly irrational behavior is a direct result of activist investor Carl Icahn's heavy pressure on the company.
A year ago, Icahn had put together a 0.8% ownership stake in eBay and started pushing for strategy changes. The company refused to take his advice, so Icahn bought more shares and tried again.
By October, eBay had already decided to spin out its PayPal online payments service, but Icahn owned 2.5% of the company and insisted management think about selling that operation to some cash-rich tech giant instead.
Well, eBay still preferred the PayPal spin-off idea, and Icahn still wasn't happy. Nowadays, his eBay ownership has expanded to 3.7%, and the company is pretty much doing what he wants -- not exactly but close enough.
So, alongside the earnings report, eBay announced that it had reached a standstill agreement with Carl Icahn. The activist investor promises not to buy any more eBay stock in return for some concessions from eBay's active leadership.
In this case, that means adding an Icahn-selected name to eBay's board of directors and accepting "certain corporate governance provisions" to PayPal's starting papers.
Icahn picked Icahn Capital hedge fund manager Jonathan Christodoro, who is a merger analyst and already serves on four boards under Icahn's influence. eBay also gave Icahn the option to place his candidate on either eBay or PayPal's board when the two companies split later this year. Given Christodoro's field of expertise, I would expect him to move on with PayPal and continue looking for buyout-style exit strategies.
In other news, eBay plans to eliminate about 2,400 positions in the first quarter. This 7% workforce reduction will be spread across PayPal, eBay proper, and the eBay Enterprise online store-building service. It's not something Icahn has explicitly asked for, but layoffs are a common enough side effect of drastic reorganizations such as the spin-off of a major business division.
And if that wasn't enough, eBay is now contemplating a sale or spin-off for the Enterprise division as well. "Enterprise is a good business, but it has become clear that it has increasingly divergent opportunities and limited synergies with eBay," said eBay CEO John Donahoe in a prepared statement. With limited synergies at work between the divisions, it might be better to just do a clean break and reinvest the resulting cash inflow somewhere else.
Icahn, of course, might use his large stock ownership and board representation to explore his favorite options for using surplus cash. He likes selling operations that no longer make sense but is not a big supporter of making acquisitions himself. Instead, he prefers enormous share buyback and dividend programs, like the ones he suggested for Apple in recent years.
But wait -- there's still more. eBay's board of directors is attempting to stiff-arm Icahn's influence by diluting Christodoro's newfound powers. The company is adding three new directors, swelling the boardroom ranks to 15 members.
The two additional board members aren't just any old seat-fillers, either. Perry Traquina recently retired from Wellington Management after leading that investment service for 34 years. Just before he left Wellington, the company had convinced Oracle to buy Wellington protege and cloud computing upstart, Datalogix. In other words, Traquina is no stranger to buyout plans.
Frank Yeary is no merger slouch, either. Before co-founding investor advisory firm CamberView and serving as vice chancellor of UC Berkeley, Yeary was known as Citigroup's -- wait for it -- head of mergers and acquisitions.
There is a chance that these high-powered merger experts will simply work with Jonathan Christodoro to set up an extremely favorable PayPal buyout. But they were more likely selected for their ability to argue against Icahn's selected advisor, picking apart merger talks before they go too far.
Either way, eBay has become a high-stakes games of chess. Carl Icahn and his team want to monetize PayPal to the hilt before the service peaks, while eBay would rather hold on a little tighter and see where this train is headed. If I were an eBay shareholder today, I would hope that Icahn settles his differences with eBay's appointed leaders as soon as possible. The arguments on both sides have merit, but the uncertainty of squabbling over the long-term strategy will only hurt the company overall.