Online auction marketplace eBay (Nasdaq: EBAY) is generating a lot of attention from activist investors in 2014.
Because activist investor Carl Icahn wants eBay to sell or spinoff PayPal. Or, rather, he did.
Icahn made a push early this year for eBay to sell its entire PayPal arm and then later softened his stance to suggest that eBay should spinoff 20% of PayPal in an IPO.
But this begs this bigger question: should eBay sell Paypal in the first place?
March 2013 was the first time I compared the size and growth rate of PayPal compared to the size and growth rate of eBay’s remaining businesses. When I did, it became immediately clear that it was only a matter of time before eBay’s PayPal arm grew to be bigger than eBay’s entire marketplace.
At that time annual growth rates for eBay as a whole were between 10% and 16%. Annual growth rates for PayPal, meanwhile, were between 22% and 29%. Little has changed.
Indeed, it is only a matter of time before revenue from eBay’s PayPal unit surpasses revenue from its online marketplace. It could even be happening right now in the current quarter.
The chart below illustrates this point perfectly. The black line, representing PayPal’s revenue, is clearly catching up to revenues from eBay’s marketplace, represented by the blue line.
Source: Statista/Business Insider
What happens when PayPal surpasses eBay’s marketplace? Should eBay sell PayPal then?
The reality is that the partnership between eBay and PayPal is pretty mutually beneficial at the moment. PayPal is driving revenue growth for a company that would otherwise be leveling off.
For its part, eBay brings a lot of revenue to PayPal since the online payment service is the most convenient way – and often the only way – to pay for items purchased on eBay. eBay marketplace transactions account for roughly half of PayPal’s revenue.
But there is a strong case to be made for eBay spinning off PayPal. This argument centers around the fact that eBay is one of the best online marketplaces in the world and PayPal is one of the best digital payment systems in the world. Why should these two fall under the same roof?
The activist investor thesis is that people looking to invest in the future of digital payments might not want to invest in eBay’s online marketplace and vice versa. By separating the two investors interested in those specific industries will be able to purchase shares of the individual companies, driving prices higher and unlocking value.
This is the idea behind the Kraft Foods (Nasdaq: KRFT) and Mondelez (Nasdaq: MDLZ) split in which Kraft spun off some of its faster-growing and international brands into a separate company.
Icahn eventually dropped his bid to have PayPal spun off when eBay agreed to appoint an independent director. The CEO also cited that he and Icahn had come to an agreement that eBay’s ownership of PayPal still made sense.
Should eBay sell PayPal? I’m starting to think so.
When you consider that the businesses of eBay and PayPal are so closely intertwined, I’m inclined to agree that it makes sense for eBay to maintain a significant stake in PayPal.
But if eBay decided to spin off 20% of PayPal in an IPO it would retain 80% of the company. That means the best of both worlds.
eBay would retain a significant interest in PayPal and wouldn’t have to change the relationship between the PayPal and its online marketplaces. But it would also unlock any value pent up in PayPal’s ownership by a slow-moving online marketplace. People want to invest in a digital payment system with 48% of its transaction volume overseas and only 50% of its transaction revenue from the eBay marketplace.
PayPal grew 25% in 2012 and 18.5% in 2013 while eBay only grew 12.8% and 12.6% respectively. I think people want to invest in these companies independently of each other. I think eBay should IPO PayPal.
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