PayPal spinoff gives EBay an opportunity to rebuild
The breakup of EBay Inc. and PayPal on Friday uncouples one of the most successful business pairings from the dot- com days, leaving one company to do some soul- searching and rebuilding, and setting the other free to f lex its technological might.
Thirteen years after it acquired PayPal in a $ 1.3- billion deal, EBay is spinning off the lucrative digital payments business and facing the brutally competitive ecommerce world on its own — a dot- com- era Internet business preparing, yet again, to remake itself.
The spinoff will enable PayPal to grow more quickly and compete more aggressively in the mobile payments space, analysts say, which is heating up with new entries such as Apple Pay, announced in September. PayPal in 2014 generated $ 7.9 billion, nearly half of EBay’s total revenue, and its growth outpaces any other division of EBay, according to company f ilings. In this year’s second quarter, PayPal grew 16% over the previous year, while EBay’s marketplaces shrank 3%.
EBay will come out of this separation with its valuation and share price lower than PayPal’s, and analysts say stockholders who bought EBay shares so they could own PayPal are likely to dump them next week. Founded 20 years ago this fall, EBay has succeeded in adapting to the changing Internet world, but it is losing customers to Amazon. com, its mobile and Web technologies have been widely criticized and it has been unable to effectively enter one of the fastest- growing consumer markets — Asia.
The companies split at midnight Friday, after new PayPal shares were issued to stockholders. They begin trading Monday as independent companies.
Although beset by challenges, the split offers EBay an opportunity to clean house and build an e- commerce business that isn’t distracted by acquisitions or experiments, or the power and resource battles that have often played out with PayPal, say analysts.
“We think that [ EBay’s] marketplaces business has the most to gain in the splitup,” said Bill Smead, chief executive of Smead Capital Management, which owns about 1.5 million EBay shares. “When investors are enamored with one side of the company, then a disproportionately large part of the time, attention, capital, resources and best efforts would go to the favored part, in this case, PayPal.”
Buying PayPal has paid off for EBay. It acquired the payments company, then just 3 years old, for $ 1.3 billion in 2002, just eight months after PayPal went public. Today, PayPal’s market cap is an estimated $ 43 billion; EBay’s is $ 33 billion.
“It was really one of the great Internet segment acquisitions of all time,” said Scott Kessler, a tech analyst with S& P Capital IQ.
Back then, EBay’s resources enabled PayPal to invest in fraud detection programs and hire lawyers to fend off federal regulators who PayPal feared would control it like a bank.
EBay’s valuation, including the marketplaces and payments businesses, has grown by five times since the day of the acquisition in 2002, and its share price rose from $ 12.98 to $ 66.29 on Friday, up 70 cents, or 1.1%.