"PayPal is the Gem"
Billionaire Carl Icahn made headlines recently when he acquired part of eBay (NASDAQ: EBAY). Upon making his investment, Icahn proposed splitting off eBay's business unit PayPal as a separate company. So far, eBay has resisted Icahn's proposal.
After battling PayPal in the market for online payments, eBay acquired PayPal for $1.5 billion in 2002. Since then, PayPal has become eBay's fastest-growing business division, riding a boom in online payments. In 2013, PayPal had 143 million users and processed $180 billion in payments. PayPal's online-payment capabilities are a major asset for its parent company eBay, which is based in Silicon Valley.
In a press statement, eBay announced that its board considered Icahn's proposal and rejected it. The company stated: "eBay's Board of Directors has concluded that the company and its shareholders are best served by the current strategic direction of the company and does not believe that breaking up the company is the best way to maximize shareholder value."
Undeterred by such resistance, Icahn is nominating two of his employees for seats on eBay's board. In an interview reported by the Wall Street Journal, Icahn stated that an independent PayPal could become acquired, making the prospect of a spinoff even more attractive. "PayPal is the gem," stated Icahn. Icahn said he will engage in a proxy fight, if necessary, to split off PayPal.
Gearing up for a fight
In a proxy battle, activists like Icahn attempt to persuade shareholders to use their individual proxy votes to oppose top management. Icahn is a battle-tested veteran of corporate power struggles. Recently, he challenged Apple, Dell, and Netflix before targeting eBay.
Splitting off PayPal is not a new idea. Such a proposal has been considered and rejected before. Analysts are divided about whether a spinoff would be a net positive for shareholders.
Analysts who favor the proposal maintain that eBay's competitors would be more willing to use PayPal's online-payments platform if it were not part of a larger rival like eBay. Analysts who criticize Icahn's proposal believe that keeping PayPal in-house helps eBay compete against larger companies like Amazon (NASDAQ: AMZN). Moreover, spinoff critics argue that a unified eBay helps fund PayPal's long-term expansion.
Future prospects for eBay
Regardless of the outcome, the publicity of a high-stakes battle over PayPal will focus attention on eBay. Analysts note that management will be under increased pressure to deliver value to shareholders, one way or the other.
"Rest assured that when we see a path that unlocks value, we pursue it," said eBay's Chief Executive John Donahoe in a January 22 conference call discussing fourth quarter 2013 earnings. Annual revenue increased 14 percent at eBay, while earnings were up 15 percent. Over the past three years, eBay's stock price has increased approximately 75 percent.
Investors will do well in 2014 following Icahn and eBay's management team.