By Deepa Seetharaman and Supantha Mukherjee
(Reuters) - EBay Inc's agreement on Tuesday to spin off PayPal next year will give the unit more flexibility to strike deals in the rapidly evolving payments space as growth at the company's traditional e-commerce business slows.
The surprise move is a huge about-face for eBay's leadership, including Chief Executive Officer John Donahoe, who resisted shareholder activist Carl Icahn's calls for a split earlier this year and led a months-long campaign to convince investors that eBay should remain intact.
Icahn, eBay's sixth-largest shareholder, eventually backed off in April. But eBay directors and executives shifted their stance on the split in June after a six-month internal study of the payments landscape, Donahoe said in an interview.
"We felt like a couple things were changing," Donahoe said. "Most notably, the pace of change in this competitive environment, and payments and commerce is accelerating and will continue to over the next three to five years."
By splitting off PayPal, the fast-growing payments division and the new eBay would have "more focus, more flexibility, more agility, more ability to move quickly," said Donahoe, who will step down as CEO after the spinoff in the second half of 2015.
Donahoe and Chief Financial Officer Bob Swan, who will also leave next year, plan to serve on the boards of one or both companies after the split. EBay will spin off PayPal as a publicly traded company in a transaction that will be tax-free to shareholders.
PayPal's next CEO will be Dan Schulman, former head of American Express Co's online and mobile payment business. The new eBay will be headed by Devin Wenig, president of eBay marketplaces and former head of the markets division at Thomson Reuters Corp.
EBay's shares jumped as much as 8.8 percent after the announcement. They closed up 7.5 percent at $56.63.
By freeing itself from the slower-growing parts of eBay, PayPal can build partnerships with e-commerce rivals and seize market share from payment startups like Stripe, backed by several PayPal founders, and technology behemoths like Apple Inc, which unveiled its own mobile payments initiative earlier this month.
"There are those who have not embraced PayPal because they're part of eBay," said Richard Sichel, chief investment officer of The Philadelphia Trust Co, which manages $2 billion and owns eBay shares. "It's more of a pure play then."
The split highlights the slowing growth of the marketplace business, which may be less alluring for some investors on its own. PayPal was founded in the late 1990s, went public in 2002 and was acquired by eBay soon after for $1.5 billion.
The "transaction implies negative trends for the eBay marketplace business, which has been suffering from greater competitive headwinds recently," RBC Capital analyst Mark Mahaney said in a research note.
'RIGHT GUY AT RIGHT TIME'
EBay has been reviewing the possibility of a PayPal split every year since 2008, when the company made the decision to sell Skype, Donahoe said. The board reviewed this option during an annual executive retreat, which this year happened just a week after David Marcus, who led PayPal for two years, stepped down to run Facebook Inc's messaging products.
Marcus' exit helped "reinforce" the decision to spin off PayPal and allowed the board the chance to attract executives by offering the possibility of a CEO role, Donahoe said. He added that the spinoff helped PayPal attract Shulman to the post.
"I don't think we would have gotten Dan if it weren't for having a CEO opportunity and he is just the right guy at the right time," Donahoe said on a conference call with analysts.
PayPal could be acquired again down the line by a technology company trying to expand into mobile payments, such as Apple, investors and analysts said. The standalone marketplaces division of eBay could also be an acquisition target, they said.
The split comes as several activist investors step up pressure on other companies to spin off assets as a way to create value. B/E Aerospace Inc and JDS Uniphase Corp are among those that did, while others like Darden Restaurants Inc and EMC Corp are resisting.
"This is clearly not a move executed from a position of strength," Macquarie Capital analyst Ben Schachter said in a research note on eBay's PayPal spinoff.
Icahn pushed for a PayPal spinoff this year in an acerbic war of words that quieted down in April. He also withdrew his two nominees to eBay's board, but in a concession, eBay added a 10th independent director, David Dorman, a founding partner of investment firm Centerview Capital Technology.
Meanwhile, Third Point LLC, a hedge fund run by activist Daniel Loeb, has taken a "significant" stake in eBay Inc and has had discussions with its chief executive officer, a source familiar with the matter said on Tuesday.
"We are happy that eBay’s board and management have acted responsibly concerning the separation – perhaps a little later than they should have, but earlier than we expected," Icahn said in a blog post.
EBay had a market value of $65.36 billion as of Monday.
The spinoff will separate the payment business, which contributes a little over 40 percent to eBay's revenue, from its marketplaces and enterprise businesses, such as the online auction operation.
EBay said revenue in its marketplaces and enterprise unit increased 10 percent to $9.9 billion in the last four quarters, while PayPal revenue rose 19 percent to $7.2 billion.
Goldman Sachs and Allen & Co LLC are eBay's financial advisers and Wachtell, Lipton, Rosen and Katz is its legal counsel.
(Reporting by Deepa Seetharaman in New York and Supantha Mukherjee in Bangalore; Additional reporting by Lehar Maan in Bangalore, Liana B. Baker in New York, Svea A. Herbst in Boston; Editing by Savio D'Souza, Robin Paxton, Jeffrey Benkoe and Bernard Orr)