Carl Icahn opens an eBay position and proposes a PayPal spinoff

Market Realist

Carl Icahn's positions in eBay and Apple: Investor takeaways (Part 1 of 2)

Carl Icahn and eBay

Activist investor Carl Icahn opened a new position in eBay (EBAY) and proposed a spinoff of the company’s PayPal business. Although eBay dismissed the suggestion, shares went up around 7%.

eBay said in its earnings release yesterday that companies controlled by Carl Icahn had, earlier in the month, acquired shares and derivative securities that give him a stake of approximately 0.82% in the e-commerce and online payments company. The release said that eBay also received a notice from Icahn indicating that he has nominated two of his employees to its Board of Directors and submitted a non-binding proposal for a spinoff of its PayPal business into a separate company.

eBay said Icahn’s board nominations will be passed on to the Board’s Corporate Governance and Nominating Committee, which will consider them in the ordinary course of business.

Regarding Mr. Icahn’s separation proposal, eBay’s stated:

  • “[Our] Board of Directors routinely assesses the company’s strategic direction and has explored in depth a spinoff or separation of PayPal. eBay’s Board of Directors has concluded that the company and its shareholders are best served by the current strategic direction of the company and does not believe that breaking up the company is the best way to maximize shareholder value. As part of eBay Inc., PayPal is able to leverage the company’s technology capabilities, commerce platforms and relationships with retailers, brands and large merchants worldwide. Payment is part of commerce, and as part of eBay, PayPal drives commerce innovation in payments at a global scale, creating value for consumers, merchants and shareholders.”

eBay said on its earnings call that it’s seeing a convergence of its commerce and payments businesses and that a separation as suggested by Icahn will not be beneficial. Elaborating on this assertion, president and CEO John Donahoe said on the call that eBay accelerates PayPal’s success, as PayPal has benefited from signing up eBay customers with zero acquisition costs. eBay and PayPal have together created mutually reinforcing network effects, especially in mobile. PayPal was successful in mobile payments, with eBay’s customers being an important source of PayPal’s early mobile payments volume. In 2010, PayPal generated ~$600 million of mobile payments volume, 80% of which came from eBay mobile apps. In 2013, PayPal’s mobile payment volume grew to $27 billion, both on and off eBay, which was a 45x increase in three years.

Secondly, eBay’s data is advantageous to PayPal, as the latter’s risk management capabilities are a source of competitive advantage, and eBay enhances PayPal’s risk capabilities by providing closed-loop global transaction data. This can be evidenced from PayPal’s loss rate of only 31bps on $180 billion of total payment volume.

Thirdly, eBay funds PayPal’s growth by being a major contributor to PayPal’s profitability and expansion. eBay represents approximately one-third of PayPal’s revenue and well over half of its profits. eBay continues to generate over 30% of PayPal’s new users at zero acquisition cost, and in 2013, eBay was the significant contributor to PayPal’s profit growth.

For 4Q 2013, revenue rose 13%, to $4.53 billion, but missed analyst estimates. The company reported a net income of $850 million, or $0.65 per share in 4Q 2013 compared with a profit of $751 million, or $0.57 a share, a year earlier.

eBay said both Marketplaces and PayPal achieved record mobile results in 2013, each exceeding $20 billion in mobile volume. Mobile users represented 40% of eBay’s 36 million new users and accounts in 2013, contributing $35 billion in Enabled Commerce Volume (ECV). eBay’s total mobile commerce volume grew 88%, with eBay reaching $22 billion and PayPal hitting $27 billion in 2013.

PayPal delivered a strong 4Q performance with accelerating momentum in its merchant services business. Revenue increased 19% in both the quarter and the full year, resulting in $6.6 billion in 2013. PayPal gained 5.2 million active registered accounts in the quarter and ended the year with 143 million, a 16% increase. PayPal’s net total payment volume (TPV) grew 25% in the quarter, with 3 billion transactions generating $180 billion in net TPV for the full year.

The company said as mobile technology continues to change commerce and blur the lines between online and offline products, eBay has tremendous opportunities in the $10 trillion commerce market going forward.

Amazon (AMZN) is eBay’s biggest competitor, but it also faces competition from the online marketplaces of brick-and-mortar retailers such as Wal-Mart (WMT), Best Buy (BBY), and Target (TGT) that stand to benefit from mobile technology developments. To learn about Amazon’s advantage over these other competitors, see Stock pick: Why Amazon benefits as traditional retailers fall.

Continue to Part 2

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