Must know: Why Lone Pine Capital exited its position in eBay

Market Realist

Must-know update: Lone Pine Capital's positions in 4Q 2013 (Part 7 of 8)

(Continued from Part 6)

Lone Pine Capital exited a 2.72% position in eBay Inc. in the fourth quarter. Lone Pine had initiated the position in 2Q 2012. eBay is one of the world’s largest online trading communities and saw interest from hedge funds Farallon Capital Management and Omega Advisors in the fourth quarter last year.

Shares in eBay gained recently after billionaire activist investor Carl Icahn sent a letter to eBay shareholders. In his latest attack, Icahn criticized the company’s board and management over alleged certain “conflicts of interest” and “multiple lapses in corporate governance.” He further reiterated his call to split PayPal from eBay. PayPal, which was acquired by eBay in 2002 for $1.5 billion, is the company’s fastest growing business, with 5.2 million active registered accounts in 4Q 2013 and 143 million users at the end of 2013. PayPal saw revenue up 19% in 4Q 2013, outpacing 12% sales growth at eBay’s core marketplace unit. The stock is up 9% YTD but was up only 2% in 2013.

In January, Icahn built a stake of approximately 0.82% in eBay and proposed splitting PayPal into a separate company. Icahn also indicated that he has nominated two of his employees to eBay’s Board of Directors. eBay rejected Icahn’s spin off proposal and said the board nominations will be passed on to eBay board’s corporate governance and nominating committee, which will consider them in the ordinary course of business.

In his February 24 letter, Icahn claimed that eBay board member Marc Andreessen “has engaged in several transactions that lead us to question his loyalty to eBay.” Among other claims by Icahn, Andreessen is alleged to have invested in and actively advised, no less than five direct competitors of eBay and to some extent PayPal, including Boku (mobile payments platform), Coinbase (Bitcoin wallet), Dwolla (secure online money management), Jumio (online and mobile credit card payments), and Fab (design e-commerce). Icahn added that another board member Scott Cook has retained almost $1 billion of stock in PayPal’s direct competitor Intuit. Icahn further said these two board members “appear to have put their own financial gain in ongoing conflict with their fiduciary responsibilities to stockholders.” The activist investor also attacked eBay CEO John Donahue saying, “Donahoe appears to lack awareness about what is going on around him on his board and in the marketplace.”

In response, eBay said in a statement that instead of “more constructive and substantive discussions” Icahn has resorted to “mudslinging against two impeccably qualified directors.”

In a February 27 letter, Icahn renewed his attacks on eBay and stressed on the conflicts of interests of board members Marc Andreessen and Scott Cook. The investor claimed Andreessen “preempted” Skype’s IPO, by purchasing 70% of Skype for less than what eBay paid for it. Andreessen’s group then profited by about $4 billion in only a year and a half, by selling Skype to Microsoft for $8.5 billion, thrice the value that they initially paid to eBay. Icahn said he will inspect “all books and records” associated with the Skype transaction.

eBay founder and chairman Pierre Omidyar said in a statement that he fully supports Andreessen and Cook and that “Carl Icahn is making unsubstantiated claims about our company and deliberately impugning the integrity of our directors.”

Despite eBay strengthening its mobile platform with acquisitions, PayPal is facing intense competition in the space from startups such as Square, Dwolla, Clover, and large companies such as MasterCard (MA) with PayPass Wallet Services, Visa (V) with its V.me, Google Inc. (GOOG) with its Google Wallet, and more recently, Apple (AAPL) which has shown interest in handling payments through mobile. eBay peer Amazon (AMZN) is also reported to be working on a new Kindle-based person-to-person (P2P) check out and payment system. Forrester Research forecasted last year that U.S. mobile payments will reach $90 billion in 2017, a 48% compound annual growth rate (CAGR) from the $12.8 billion spent in 2012.

For 1Q 2014, eBay said that it expects net revenues to be between $4.1 billion and $4.2 billion with EPS in the range of $0.51 to $0.53 and non-GAAP EPS in the range of $0.65 to $0.67. For the full year, eBay estimates that it will see $18 billion to $18.5 billion with non-GAAP EPS in the range of $2.95 to $3.00.

Continue to Part 8

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