Did eBay Overpay For Recent Acquisition?

| About: eBay Inc. (EBAY)

Recently, Best Ideas Newsletter portfolio holding eBay (NASDAQ:EBAY) announced the acquisition of Chicago-based payment platform Braintree for $800 million in cash. Braintree is best known for accepting mobile transactions, and it is currently on pace to process $12 billion in net payment value for 2013.

What is Braintree?

Braintree is a fairly straightforward payment processing platform. While some processors demand variable fees and certain payment thresholds, Braintree is a simple 2.9% + $0.30 per transaction. Importantly, the transactions process in just two days, allowing small or capital hungry firms to access cash at a quick pace. Of the forecast for net payment volume of $12 billion in 2013, the firm expects $4 billion to be attributable to mobile payment processing.

Why was eBay interested?

Straightforward payment processing with a simple fee structure is an easy business model to mimic. What is difficult to do is steal customers from a platform that has already been fully integrated into the purchasing experience. Braintree's customers aren't a list of large retailers like J.C. Penney or Home Depot, but rather a new group of fast-growing start-ups like Uber, Air BnB, Livingsocial, Open Table (NASDAQ:OPEN), and Hotel Tonight.

Though we doubt any of these firms will become the next Wal-Mart in terms of revenue, Braintree's major customers are all enjoying secular growth trajectories. Additionally, Braintree will be run as a separate entity, allowing eBay to maintain distinct pricing between PayPal and Braintree, giving the firm exposure to different clientele.

Did eBay pay too much?

Without specific financial details, it is difficult to discern whether or not the price eBay paid for Braintree was appropriate. Inc.com's 5000 list pegged Braintree's 2011 revenue at a paltry $9.9 million, though we think this figure will be closer to $40-$50 million in 2013. Still, eBay noted that the transaction won't be meaningful to revenue in 2013, and that it would also have a negative $0.01 impact on 2013 non-GAAP earnings per share, suggesting the firm isn't profitable at this point.

Valuentum's Take

Though it is difficult (and perhaps irresponsible) to value the deal based on net payment volumes alone ($12 billion), we are confident in CEO John Donahue's capital allocation abilities. Plus, eBay made out pretty well when it acquired Elon Musk's payment processing company known as PayPal (Elon Musk is also of Tesla fame). We continue to hold shares of eBay in the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: EBAY is included in the portfolio of our Best Ideas Newsletter.

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