eBay cuts PayPal loose - and its own throat?

Profile picture for user slauchlan By Stuart Lauchlan September 30, 2014
Summary:
eBay bows to the inevitable and cuts PayPal loose to fend off the likes of Apple Pay, but where does this leave it in the increasingly hostile e-commerce market?

Happy about spin-off of PayPal.

In one short tweet, it was clear who was the winner in a tussle for control inside eBay - and it wasn’t the firm’s management!

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The tweet came from activist eBay shareholder Carl Icahn after it was confirmed that eBay is to spin-off its PayPal operation which accounts for roughly 40% of the parent company’s revenue.

eBay CEO John Donohoe insists that the decision was made as a result of a strategic review, but the wider view taken in the marketplace was that this was a victory for Icahn who had been lobbying hard for such a move.

Certainly back in January, Donohoe - along with the rest of the eBay management team - was of the view that the two firms worked better together:

We and our board believe the best way to drive long-term shareholder value is to keep eBay and PayPal together, to capitalize on the opportunities, And the distraction and dis-synergies of separation would be happening exactly at the wrong time. We’re in this window of opportunity of commerce.

But circumstances do of course change and yesterday Donohoe’s position was:

A thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively. The industry landscape is changing, and each business faces different competitive opportunities and challenges.

Nonetheless there is a clear impression that this is not as proactive a move as the board might like to present it. Macquarie Capital analyst Ben Schachter said in a research note:

This is clearly not a move executed from a position of strength.

If Icahn is the winner, Donohoe seems to be the loser. He won’t even have the consolation of heading up either of the two newly independent companies. American Express veteran Dan Schulman will be coming in to head up PayPal while the eBay marketplace business will continue to be led by Devin Wenig, who will become chief executive after the split.

For his part, Icahn seems pleasantly surprised by the volte face on the part of the eBay team, noting on his blog:

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.

The move liberates PayPal to come to better working relationships with the likes of Amazon and Alibaba which might have been constrained by it being locked in to a competitor. It also frees it up to compete better - or defend itself better - against Apple’s new Apple Pay mobile payments offering.

Peter Roe of research firm Techmarketview notes:

PayPal has been aggressively innovating outside of its on-line comfort zone with mobile wallets, etc., but (certainly in the UK) it is expensive and has a long way to go in achieving coverage of merchants and developing a USP. Nevertheless, it will have the cash to disrupt targeted markets and away from the link with eBay it will also have the incentive and the experienced management team to try.

On the other hand, the separation must make eBay more prone to a takeover bid. Aliaba perhaps? It’s got the cash - and it would need it as eBay minus PayPal is probably still worth around $23 billion.

My take

An acceptance of the inevitable by eBay and a decision that might have been better taken pre-Alibaba IPO and before we all started thinking about how Apple Pay will work in practice.

 

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