PayPal Spinoff Gives eBay Opportunity to Rebuild

SAN JOSE, Calif. (San Jose Mercury News/TNS) —

The breakup of eBay 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 flex 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 e-commerce world on its own — a dot-com-era internet business preparing, yet again, to remake itself.

The spinoff will allow 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 Inc.’s total revenue, and its growth outpaces any other division of eBay, according to company filings. In the second quarter of this year, PayPal grew 16 percent over the previous year, while eBay’s marketplaces shrank 3 percent.

“EBay is in a much worse position right now than PayPal,” said Scot Wingo, e-commerce analyst and executive chairman of ChannelAdvisor.

EBay will come out of this separation with its valuation and share prices lower than PayPal’s, and analysts say stock owners 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, 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 split-up,” said Bill Smead, CEO 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 three 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 allowed PayPal to invest in fraud-detection programs and hire lawyers to fend off federal regulators whom they feared would control it like a bank.

“Probably, PayPal wouldn’t be where it is today without eBay buying PayPal,” Kessler said.

For much of the time they were joined, each company helped the other. Valuation of eBay Inc., including the marketplaces and payments businesses, has grown by five times since the day of the acquisition in 2002, and its per-share stock price rose from $12.98 to more than $65 last week.

And PayPal’s soaring revenue helped eBay grapple through some of its costly mistakes: the $2.6 billion Skype acquisition, which resulted in a $1.4 billion write-down; expanding into China in 2003 and being quickly pushed out; and attempting to launch its own same-day delivery service in 2012, which quickly fell flat.

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