Should PayPal Split from eBay?

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eBay and PayPal executives as well as shareholders, such as Carl Icahn and Bill Smead are at odds to whether or not the two companies should split. PayPal’s co-founders, Elon Musk and Peter Thiel are even at odds on the issue. “This is not the right time for the companies to be split up,” Thiel told Forbes. “But there will be a lot of time to revisit it.” This statement came a couple days after Musk made his statement to Forbes. “It doesn’t make sense that a global payment system is a subsidiary of an auction website.”

eBay’s CEO John Donahoe says that PayPal needs eBay’s loyal customer base to survive.  I am compelled to disagree since PayPal functions separately from eBay and is used many businesses large and small.  They have features that Square and other companies don’t in the fact that they can be linked to your checking account. PayPal has recently started rolling out a new website, and it accounted for around 40% of eBay’s $16 billion in revenues in 2013.

Bill Smead of Smead Capital Managment, says that if the companies split investors stand the chance of seeing decent gains over the next 12-24 months but, will see a significant loss of gains of the next 10-20 years. eBay is Smead’s third-largest holding, according to FactSet, but the firm only owns about 0.06% of the $75 billion company.

Carl Icahn of Icahn Enterprises, issued an open letter on Wednesday against current eBay management, where he accused CEO John Donahoe of “inexcusable incompetence” that cost stockholders $4 billion. That was the second this week and eighth letter on the topic in 13 business days. He currently owns 2.2% on the companies shares.

eBay competes with companies like Amazon and Overstock.com. Last year eBay reported revenue of $8.2 billion, growing 12% year after year, which is not as much as Overstock.com ‘s 16% growth.  Overstock.com is a significantly smaller business, and is also much cheaper at just 0.5 times sales versus a 5.0 multiple for eBay.

Compared to Amazon, eBay comes up short, as Amazon’s revenue increased more than 20% year after year.  Amazon is looking at continued growth in excess of 20%, and as Amazon grows, over $75 billion, it becomes harder for eBay.

eBay is expected to remain weak, while Amazon and Overstock.com ‘s outlook will likely remain intact.  eBay is able to maintain operating margins in excess of 20% because of PayPal. Without PayPal, eBay is just a slow-growing Marketplace with margins equivalent to its peers.

I personally would go with the split.  Smead might be right about the lag 10-20 years from now but, I will cross that bridge when I get there.  I would rather see the growth over the next couple of years.  I think PayPal has the ability to stand on it’s own.  eBay is the one that I think suffer the most and I think the exec’s know that too.  Why else would eBay executives say No to a split out right, while debate exists with the other team.  As e-commerce continues to grow we will see who comes out ahead.

Onyx Contributor:  R.L. Knight
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