EBay Inc. (NASDAQ:EBAY), a provider of retail e-commerce and auctioning services, disclosed its plan of acquiring Braintree for an all cash-transaction of $800 million. This acquisition would help its subsidiary PayPal access Braintree’s current and prospective clients. As of last year, PayPal, processed more than $118 billion in secure payments vis-à-vis Braintree’s $12 billion. Investors seemed quite happy after hearing the news, which reflected in eBay’s stock price that increased 4.48% yesterday.
There have been numerous explanations attributing the acquisition, some quantitative and others qualitative.
Anticipated increase in mobile commerce (m-commerce) usage
According to Forrester, Mobile Commerce usage in the US is anticipated to grow at a Compound Annual Growth Rate (CAGR) of 39% and could hit $31 billion by 2016. Braintree is one of the fastest growing start-ups in this segment (m-commerce), which focused on integrating its payment platform with mobile platform (Braintree also stands famous for its agility). In order to address the upcoming demand trend, eBay Inc. would be wanting to acquire a company like Braintree.
Facebook vs. Apple vs. Amazon vs. PayPal vs. Square
Facebook (NASDAQ:FB) wanted to put an end to typing billing details on the small screen and hence, entered into a contract with Stripe and Braintree. But, PayPal went a step ahead by acquiring Braintree. The cash payout for the acquisition would have come from eBay’s cash holding of $10 billion as on Jun 30, 2013.
Braintree: A strategic fit for PayPal
Braintree’s acquisition by PayPal could be looked from three strategic angles.
- To attract young users: Braintree seems to have a lot of young users which PayPal had always struggled to gain, according to an analyst from Keefe, Bruyette and Woods (KBW). It was observed that the consumers in this market are more likely to own advanced phones as compared to other age groups.
- Target Benchmarking: About 40% of eBay’s revenues come from PayPal. PayPal aimed to achieve $20 billion in mobile payments processing this year. This could be easily achieved with the help of Braintree, since the company attracts a lot of transcations through its advanced mobile apps.
- Client Advantage: Braintree has access to big clients like OpenTable (NASDAQ:OPEN), through which the company was expecting to generate $12 billion. Cross-selling is yet another aspect which makes Braintree a strategic fit when looked at from PayPal’s perspective.
Payments Revenue Growth better than Total Revenue Growth
Over the past five years, eBay’s payments revenue growth has always been higher than that of the company’s total revenue growth. Also, payments revenue gained more weightage as a percent of total revenue. The relevant revenue growth chart is shown below.
Even at times of recession this segment had registered attractive growth. The segment’s profitability has also been around 57% during FY’12, due to which eBay was able to sustain its overall margins.
In summary, this seems like a reasonable acquisition which is expected to close (after regulatory approvals) by the end of the fourth quarter 2013. View our eBay stock analysis.
To see eBay’s latest stock price movement, click here (NASDAQ:EBAY)