eBay (EBAY) shares are higher after the company announced it will split with PayPal sometime next year. After the split the two will trade as entirely separate companies, bringing to fruition a plan very much like the one laid out by shareholder activist Carl Icahn 9 months ago.
As current eBay head John Donahoe told the New York Times, after a “deliberate” review eBay and its board “got to the same place Carl got early on”. Donahoe and CFO Bob Swan will end up getting carried out on their shields after battling Icahn for months. The two will give up operational roles after overseeing the split though each is expected to retain an advisory role.
American Express exec Dan Schulman is joining PayPal as President and will head the free standing company after the split. He’s got his work cut out for him. In the last six months the world of online payments has changed radically, making PayPal look rather staid compared to Apple Pay, Alibaba (BABA) spin-off AliPay and even Jack Dorsey’s Square which raised money at a valuation of $6 billion two weeks ago.
Anyone who’s been divorced knows that announcing the split is the easy part. The devil, legal fees and re-invention of self are all in the details. Here’s what PayPal and eBay have to do before the big break-up next year:
Knock-off Apple Pay
PayPal currently handles $1 for every $6 spent online and grew 19% last year. That’s impressive but is hardly new tech. PayPal’s installed base means little in the face of payment modes changing entirely over the next few months. It needs a re-invented product to bring to market to differentiate itself from its existing product, both in the minds of consumers and partners. That brings us to #2.
Convince vendors its really separate from eBay
eBay accounts for 30% of PayPal’s revenues and 50% of its profits. The two go together like peas and carrots and have only gotten tighter as management fought against a break-up. That was ok for small vendors but major potential partners like Apple and Amazon (AMZN) are loathe to share information with rival eBay by developing strong relationships with PayPal. The point of a payment system for eBay wasn’t just the profits. As Donahoe argued, having PayPal made eBay a better merchant because it told eBay more about its customers.
A big part of PayPal’s future will be analytics. Merchants want to know how customers spend. That’s a huge part of what Square is doing and it’s going to be key to any payment system. PayPal is going to need to really break-up with eBay before former rivals will trust it.
Become a start-up
PayPal is a legend in Silicon Valley. That’s another way of saying it’s old. 19% growth won’t get it done as a freestanding concern if PayPal is going to have a stock currency to lure in young guns who will fuel the next generation of payments. PayPal’s status as the king of current online payment systems now works against it but the company makes way too much money to get rid of the old.
PayPal may have some of these things working in the background already. If so, more power to them. If not they need to step on the gas. A plan to split up “next year” will satisfy the market today but won’t keep investors satisfied for very long. eBay just started jogging and the competition is at a full sprint.
