In less than a year, if current growth rates persist, EBAY Merchant Services will surpass the EBAY Marketplace as PayPal's largest TPV contributor. This is a huge deal. For the first time ever, PayPal is proving its worth as a stand-alone company.
Why a spin-off?
First, the valuation of PayPal deserves a much higher multiple than EBAY. In an interview with Bloomberg this past July, Meg Whitman went as far as saying PayPal accounted for $15 to $20 billion of EBAY's $42 billion market cap at the time. This means that it is probably EBAY's most valuable single asset. Only a spin-off would really unlock this value. This basically addresses the point analysts have been making for years that EBAY's sum of the parts is way above its market valuation. Investors don't seem to like PayPal and Marketplaces in the same business.
Second, PayPal needs to penetrate more retailers. I don't have hard data on this, but I suspect the association of PayPal with EBAY Auctions sometimes creates a conflict of interest. A hypothetical example, albeit perhaps less now, would be Amazon (AMZN). In any case, I think an independent PayPal would have more credibility to attack all major online retailers.
Third, in the medium term, EBAY Marketplaces has to open itself up to additional payment alternatives like Google (GOOG) Checkout and Amazon FPS. If management wants to maintain EBAY Marketplaces as the top buyer destination, this is inevitable. Being free from PayPal makes this so much easier to explain and implement. Obviously there would need to be a transitional phase agreed with PayPal where exclusivity lasted a prescribed length of time.
Finally, there is an element of business focus. I won't get into this but let's just say I think EBAY marketplaces could benefit from thinking more about themselves rather than how they fit into a portfolio of businesses.