EBay and PayPal split is a divorce whose time has come.
Every good thing comes to an end. And American technology firms are not the exception. After enjoying years of bounty, they are presently facing new challenges that arose from the growth of mobile devices and the cloud. As they position themselves to respond more adeptly to these challenges, several big tech divorces are in the works. The one that is currently in the news is that of PayPal (a leading digital-payment service), which is to split with eBay, an e-commerce giant.1
Spin-offs usually have better results than mergers. However, as we are all aware, divorces can cost more than getting married. Hence, it is not an exaggeration to say that spin-offs tend to be more complicated than mergers. For instance, in corporate marriages, a lot of things can only be decided after the deal is closed. This is a sharp contrast to what happens when companies split up, in which case everything needs to be settled up front. Basically, during a spin-off, the companies must decide upfront how their assets will be divvied up, how the IT systems will be disentangled, which employees will be on which payroll, and so on.2 So it is not surprising that spin-off exercise usually keep hundreds of people busy and may cost hundreds of millions since it is a tedious affair.
Following this pattern, both eBay and PayPal decided who will be their CEOs as early as possible – Dan Schulman, who joined eBay from American Express in 2014, will lead PayPal,3 and Devin Wenig, who has run eBay’s marketplaces, will take the helm of the parent company.4
It is worth bearing in mind that the two companies that will emerge from the split will not be equal in size. EBay was a large online auction giant with plenty of cash to throw around when it bought PayPal in 2002 for $1.5 billion. But now, PayPal is not only bigger but is also stronger than eBay. Analysts currently put eBay at around $30 billion, while PayPal is estimated to be worth about $45 billion. The two companies had been in this relationship for more than a decade. So, naturally, nobody will expect them to walk away from each other quickly. As is expected of interdependent businesses with this kind of business affair, the two companies have settled on a long-term separation agreement. One of the terms of the agreement is that eBay will continue to route as much as 80 percent of its sales through PayPal. The company will do this for the next five years, after which it may decide to continue or withdraw from the arrangement.5
Companies have a lot to gain by being independent, especially in the current environment where technology and markets can change rapidly. This explains why shareholders tend to be enthusiastic about spin-offs. After this spin-off, PayPal will face new competition from giants like Apple Pay and Stripe. So, to survive and to be viable, PayPal will need to be nimbler than it currently is. That is the only way it will be able to move money from every digital device to every online merchant. At the moment, the company is most strongly associated with eBay’s platform. As a result, rival e-commerce sites has less interest in partnering with it – a factor that limited its expansion.6
Because it has the ambition of becoming a major player in online payment systems, PayPal is already acquiring more companies. First, in late 2013 it spent $800 million to buy Braintree, a company that processes transactions for mobile apps as well as facilitates transfer of money between phones. Last April, it took over Paydiant, which provides a white label mobile wallet platform that includes mobile payments, ATM cash access and other related commerce services to retailers. At the beginning of this month, the company announced it would pay $890 million for Xoom – a company that transfers remittances from America to the developing countries. Prior to these acquisitions, the company has 160 million active accounts and annual transaction volume of about $235 billion. Given that the company’s separation from eBay will leave it with a war chest of up to $6 billion, investors are convinced that more acquisitions are likely.7
For eBay, the way forward is less clear. The company currently has 155 million active buyers and can boast of an annual transaction of $83 billion in its marketplace. Although its revenues are expected to be flat this year, it has been a more profitable company than PayPal. During the dotcom boom, eBay was one of the winners in the industry. However, what made it a formidable company in that era is now holding it back. It started as an online auction site in the late 1990s. Today, a lot of things has changed. For instance, the customers of today want to be certain that they will quickly complete their online purchase as soon as possible. And since they still view eBay mainly as auction site, most of them are less convinced that the company will guarantee them that certainty, even though 80 percent of the items are sold in the site at a fixed price. The company’s business model is to provide a marketplace where others can list their wares. This model has spared the company costly investments in warehouses and logistics. But the company is finding it very difficult to meet the increasing demands of buyers who expect rapid purchase and delivery because of this lack of some form of vertical integration.8 This means that there is a high possibility that eBay’s share price will lag behind PayPal’s after the split. Across the finance sector, officials and experts agree that parent companies tend to do worse than their spin-offs. But eBay itself could be a takeover target because it a smaller and a more focused company. This simple fact could cause its share to get a bounce months after the split. The most talk about potential suitor for eBay is Alibaba – a Chinese e-commerce giant that is still struggling to gain a foothold abroad. Other likely candidates include Microsoft, Google and Amazon. Note that, although its current size makes it less digestible, PayPal can also be eyed by banks or Alibaba.9
The road ahead
Other tech firms may become encouraged to follow through with their own spin-offs if eBay’s split goes off well. Take Yahoo, an online giant with as much as 15 percent stake in Alibaba. The company can easily spin off this stake as a separate company in the following quarter. It may also hive off its Yahoo Japan if the management deems such a move to be stragtegic.10 Another tech company that might split itself is HP. If eBay’s split is successful, HP may split itself into a corporate IT vendor and a maker of printers and PCs.11 The analysts at Wall Street will not be surprised if other big technology firms have spin-off plans in their drawers. In the 1980s, many big industrial conglomerates entered into many deals in unrelated industries which made them less competitive. After they were battered by huge losses that lasted for years, they were eventually forced to slim down to be able to focus in their main businesses and core competencies.12 The modern day big technology firms may be going through a similar phase. The eBay and PayPal spin-off could be an indication that the auctions has begun.
1EBay and PayPal – Better Off Alone. (2015, July 18). The Economist, Retrieved July 27, 2015 from http://www.economist.com/news/business/21657823-ebays-split-should-make-investors-happyand-corporate-divorces-more-popular-better-alone.
2Kastiel, K. (2014, April 1). Spin-Off Guide. Harvard Law School Forum on Corporate Governance and Financial Regulations, Retrived July 27, 2015 from http://corpgov.law.harvard.edu/2014/04/01/spin-off-guide/.
3Rao, L. (2015, June 9). PayPal’s Dan Schulman Aims at Millennials’ Wallets. Fortune. Retrieved July 27, 2015 from http://fortune.com/2015/06/09/paypal-dan-schulman-millenials/.
4Foley, S. (2015, July 17). Devin Wenig steps into eBay spotlight. Financial Times. Retrieved July 17, 2015 from http://www.ft.com/intl/cms/s/0/3154777e-2c0d-11e5-acfb-cbd2e1c81cca.html#axzz3h6nN78Wt.
5EBay and PayPal – Better Off Alone, op. cit., p.56
10Oreskovic, A. (2015, January 27). Yahoo Sets Alibaba Stake Spinoff Plan, Ahares Jump. Reuters. Retrieved July 27, 2015 from http://www.reuters.com/article/2015/01/28/us-yahoo-results-idUSKBN0L02PC20150128.
11EBay and PayPal – Better Off Alone, op. cit., p.56