PayPal Spin-off Offers Little Shareholder Value
- Rumors of eBay spinning off PayPal have surfaced again.
- It’s not well understood as to how this will benefit eBay shareholders and a spin-off is therefore hard to justify.
- eBay has plenty of other alternatives for driving top line growth, or bottom line earnings.
eBay (NASDAQ:EBAY) finds itself at cross-roads, on one hand it can spin-off PayPal, which may give PayPal the ability to expand into other e-commerce ecosystems. However, it’s not understood as to whether this will help PayPal’s growth. On the other hand, the case for investing in eBay comes from its ownership interest in PayPal. Hence spinning off PayPal offers no real intrinsic benefit to shareholders at the present moment, which diminishes the likelihood of it actually occurring.
PayPal Spin-off May Not Benefit eBay Shareholders
According to The Information:
eBay has been telling potential recruits for the position of PayPal CEO that it’s considering spinning off the payments business as soon as next year, according to two people briefed on the conversations. The search for a new head of the unit began in June after former PayPal CEO David Marcus said he was leaving for Facebook.
In the early stages, eBay helped to build PayPal’s critical mass, but now that PayPal is a fully functioning and near separate entity, the idea of separating the two may sound intelligent based on conventional “business school” wisdom. However from a long-term business perspective it doesn't make a whole lot of sense. eBay is still a high margin business that can continue to acquire new businesses, or develop new services that can potentially work in an ecosystem between PayPal and eBay marketplace. Admittedly, finding a compatible opportunity that has as much growth potential will be difficult, but it’s not completely impossible for eBay to look at opportunities that it can organically grow in.
Reuters journalist Deepa Seetharaman went ahead and denied the spinoff rumor, by getting in contact with eBay’s senior executive team/board. It’s not surprising that the board is sticking with the decision that it had made earlier in the year.
“Assessing alternatives” can mean anything. eBay can develop alternative ecommerce services, it can continue to expand its business into international markets, it can buyout smaller companies and grow them organically. There are tons of different options that management can consider, even as they return cash to shareholders in the form of share buybacks, and drive incremental improvements in their core operations.
eBay’s market place generated $20.485 billion in gross merchandise volume in Q2 2014. The growth rate has continued to decline, which is why the uptick in growth from the PayPal segment is so important for sustaining eBay’s revenue growth. The company has had some difficulty with sustaining growth as it has catered to larger sellers, a segment Amazon also actively competes for.
In Q2 2014, the total payment volume on eBay was $20.485 billion, but of that amount $14.675 billion was processed via PayPal. Furthermore, PayPal offers seller protection programs that prevents sellers from being liable for fraud, paired with other extras that keeps vendors from wanting to use an alternative payment processing service. However, if eBay were to spin-off PayPal, there’s no telling whether or not eBay will continue to support PayPal, or if PayPal will offer as many benefits to eBay merchants.
In Q2 2014, PayPal’s total payment volume was $55.046 billion. Of that total payment volume, eBay contributed 26.6% of the total mix. Therefore, eBay continues to contribute to PayPal’s payment volume in a very meaningful way. However by spinning off PayPal, it is uncertain as to whether the two companies will have the incentive to offer the synergies that are currently in place.
At present, PayPal has 79% penetration rate into the eBay marketplace. eBay earns revenue from insertion fees, final value fees, along with a transaction fee from its PayPal subsidiary. Therefore, the incremental growth in transaction volume on eBay will grow PayPal transaction volume as well. So if eBay finds ways to grow its marketplace volume at a higher rate, PayPal will also see an uptick in transactional volume. Therefore it’s a matter of better execution rather than financially engineering a deal that may, or may not offer net intrinsic value.
The two segments offer significant synergies, and while PayPal could operate as a standalone business, there’s no logical explanation for how it would benefit shareholders over the long haul. Clearly the two businesses support each other, and help define eBay’s durable advantage.
Also, there are plenty of ways eBay can stimulate growth in its payment and marketplace segment without spinning off either of the two businesses. I think news headlines will eventually shy away from the topic of the PayPal spin off, and will look for more likely scenarios, where eBay will be acquiring companies.
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