The Divorce of ebay and PayPal

paypal

As far as divorces go, the split up of ebay and PayPal has been so far a reasonably amicable one. What’s ironic is ebay bought PayPal for $1.5 billion in 2002, while its value today estimated to be $45 billion. Conversely ebay is today valued much lower at $30 billion. This has been a large driving force for the merger with active investor Carl Icahn stating “PayPal’s a jewel and eBay is covering up its value.”

ebay’s last quarterly results also seem to back this up showing PayPal’s revenue growing by 20% compared to ebay marketplace down 1%. In the release of final figures for the joint company (Q2) to June 2015 eBay reported earnings of $931 million, or 76 cents per share. This is up considerably from the same period last year which came in at $883 million, or 70 cents a share. However PayPal’s dominance is obvious, contributing $2.26 billion of eBay’s Q2 revenue. ebay’s marketplace business contributed $2.12 billion to the joint company.

Another reason for the split is that they are both very different businesses operating in different markets. Elon Musk one of the co-founders of PayPal agrees: “It doesn’t make sense that a global payment system is a subsidiary of an auction website. It’s as if Target owned Visa or something.” Separating them will allow each to focus on their own set of unique priorities.

There’s another factor: technology markets change very quickly and a business needs to be responsive to change if they are to survive. PayPal in particular faces new competition with Apple Pay (which allows payments via phone). Apple has shown an ability to make complex technology easy to use for their customers – and they have many millions of dedicated followers. The impact of Apple Pay on PayPal’s business cannot be underestimated.

The benefit to PayPal investors is clear with both Elon Musk and former chief operating officer David Sacks predicting that PayPal could in the near future be worth more than $100 billion. PayPal has already been expanding its business with a series of acquisitions such as Xoom (which transfers funds from America to many developing countries), Paydiant (which helps retailers to operate mobile wallets) and Braintree (which processes transactions for mobile apps). The separation from ebay will put PayPal in a strong position to continue this trend with around $6 billion in cash reserves.

The way forward for ebay seems less certain. Part of the problem today is that its growth was pioneered on being one of the first auction sites. Today it is viewed as an auction site, when consumers are tending to prefer a quick online purchase direct from stores. Never-mind that 80% of goods on ebay are offered for sale not auction, the perception persists. However ebay’s a stable investment too. US 85 billion worth of transactions were carried out on ebay last year. It’s hard to imagine that being rivalled by a competitor. Also without PayPal ebay will have more cash to focus on its own bread and butter operations.

All this is likely to benefit investors in both companies. While the saying goes that an entity can be worth more than the sum of their parts, in this case the reverse is true, the valuation of the two separate companies after spin-off is likely to be greater than their valuation as one.

 

 

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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