2014-01-24 21:26:02.824 GMT
(For a Real M&A column news alert: SALT REALMNA
By Brooke Sutherland, Brian Womack and Tara Lachapelle
Jan. 24 (Bloomberg) -- EBay Inc. is willing to forgo a
possible 26 percent stock pop by rejecting Carl Icahn’s proposal
to split off PayPal, banking instead on the promise of longer-
term rewards by keeping its online payment unit in-house.
Shareholders including Sterling Capital Management LLC and
Kornitzer Capital Management Inc. are, so far, backing the
stance of Chief Executive Officer John Donahoe, who says that a
unified EBay helps fund PayPal’s expansion. Activist investor
Icahn called a separation of PayPal, one of EBay’s fastest-
growing businesses, a “no-brainer” that would improve value.
While EBay’s breakup value is pegged by analysts and
investors at about $69 a share, compared with $54.94 yesterday,
investor Condor Asset Management Inc. said the stock will rise
as it expands PayPal to more vendors. Sharing risk management
and transaction data helps the $71 billion company’s online
marketplace and payment units better compete against rivals such
as Amazon.com Inc. and payment processor Square Inc., said
Susquehanna International Group LLP.
“We can all come up with a higher number than $55 for EBay
shares, but that’s why we own it,” George Shipp, a fund manager
at Sterling Capital, which oversees more than $45 billion, said
in phone interview from Virginia Beach, Virginia. “I don’t know
that it’s such a significantly higher number that it means the
EBay team is doing a lousy job, or that I have a burning desire
to light a fire under the board for some sort of short-term pop.
This is not a broken company.”
Icahn Stake
EBay, whose online marketplace sells everything from
motorcycles to golf clubs via auctions and at fixed prices,
acquired PayPal in 2002 to add online-payment services. The unit
almost tripled sales in the five years ended in 2012 and now
accounts for about 40 percent of revenue at the San Jose,
California-based company.
Icahn, who took a 0.82 percent stake in EBay and is also
seeking two board seats for his employees Jonathan Christodoro
and Daniel Ninivaggi, said this week that the company “hasn’t
done as well as it should have” and spinning off PayPal would
unlock value for investors. Icahn didn’t respond yesterday to a
request for further comment.
“We have been successful exactly because PayPal and EBay
are together,” Donahoe said during an earnings call with
analysts this week. “No other payments competitor has achieved
PayPal’s success, because no other competitor has a commerce
platform like EBay.”
Amanda Miller, a spokeswoman for EBay, declined to comment
yesterday.
Better Together?
Sum-of-the-parts estimates from six EBay analysts and
shareholders ranged from $60 to $75 a share. That tops EBay’s
record high of $58.89 in December 2004, and it implies the
company should be valued as much as 37 percent more than its
closing price yesterday.
Since EBay disclosed Icahn’s stake and also reported
holiday quarter sales that missed analysts’ estimates, the
company’s shares have gained less than 1 percent.
Today, EBay fell 1 percent to $54.37.
Even though a split may deliver returns for shareholders,
PayPal is in a better position to grow as part of the combined
company, said Stephen Kahn, a Toronto-based fund manager at
Condor Asset Management.
As EBay seeks to increase PayPal’s use by other vendors,
both online and in stores, “staying together is not a bad
thing,” Kahn said in a phone interview. “Until PayPal payments
broaden significantly beyond EBay e-commerce, I think it makes
sense.”
Funding Expansion
EBay can use the free cash flow from its marketplaces
business to fund the expansion and innovation, Matt Nemer, a San
Francisco-based analyst at Wells Fargo & Co., wrote in a report
yesterday. Having PayPal integrated with EBay’s marketplace also
helps build the payment service’s customer base, said Josh West,
an analyst for Kornitzer in Shawnee Mission, Kansas.
EBay’s marketplace makes up about one-third of PayPal’s
revenue and more than half of its profits, according to CEO
Donahoe. EBay also contributes more than 30 percent of PayPal’s
new customers.
“PayPal definitely benefits from being a part of EBay, and
the distractions around trying to spin off part of it or the
whole thing could certainly hinder its long-term growth
prospects” said West, whose firm advises the Buffalo Funds,
which oversee about $8 billion including EBay shares.
Sharing data between the services makes both the e-commerce
and online-payment businesses more competitive, Susquehanna
analysts Brian Nowak and James Friedman wrote in a report
yesterday.
Nothing New
Icahn isn’t telling shareholders anything new by
highlighting the potential benefit of a PayPal split, said Shipp
of Sterling Capital. Even so, Shipp said he prefers the long-
term rewards of keeping the company together to the short-term
boost that a breakup might bring.
“PayPal could trade at a higher multiple -- we know
this,” Shipp said. “There may come a day when it makes sense,
but I don’t know that we’re close to that day. It looks to me
like the integrated company is doing well.”
While there are some advantages to keeping EBay and PayPal
together, the manager of shareholder Jacob Internet Fund said
the case for splitting up is stronger. Retailers that may be
hesitant to use PayPal because it’s owned by their competitor
could choose to adopt the service if PayPal were independent,
Ryan Jacob said in a phone interview.
Win Faster
Investors will eventually give EBay credit for the value of
PayPal, though a breakup would accelerate that, said Daniel
Johnson, a Louisville, Kentucky-based money manager at River
Road Asset Management LLC, which oversees about $10.3 billion,
including EBay shares.
“We think we can win if it stays together, but we can win
a little faster if it gets split up,” Johnson said in a phone
interview.
Even if Icahn fails to spur a transaction, the added
pressure on EBay’s leadership benefits shareholders, according
to Sean Sun, an analyst at Santa Fe, New Mexico-based Thornburg
Investment Management Inc., which oversees $94 billion including
EBay shares.
"Having this activism is good because it probably gets
management more focused and brings to light the fact that the
company is undervalued,” Sun said in a phone interview. “I
don’t think the spin is going to happen without management’s
support, but just having Icahn in there can get them thinking.”
For Related News and Information:
Icahn at EBay Shows Boards Learning to Listen to Activists
NSN MZV5B76KLVR6
EBay Says Icahn Proposes PayPal Spinoff After Taking Stake
NSN MZV1QO6KLVSU
PayPal Increases Mobile Investment as Smartphones Replace Cash
NSN MXL7666S972A
EBay deal news: EBAY US TCNI MNA
Real M&A Columns: NI REALMNA
Top deal news: DTOP
--With assistance from Beth Mellor in New York. Editors: Beth
Williams, Sarah Rabil
http://www.bloomberg.com/news/2014-01-24/ebay-bets-paypal-in-house-beats-icahn-s-plan-real-m-a.html
EBay can use the free cash flow from its marketplaces
business to fund the expansion and innovation, Matt Nemer, a San
Francisco-based analyst at Wells Fargo & Co., wrote in a report
yesterday. Having PayPal integrated with EBay’s marketplace also
helps build the payment service’s customer base, said Josh West,
an analyst for Kornitzer in Shawnee Mission, Kansas.
EBay’s marketplace makes up about one-third of PayPal’s
revenue and more than half of its profits, according to CEO
Donahoe. EBay also contributes more than 30 percent of PayPal’s
new customers.
“PayPal definitely benefits from being a part of EBay, and
the distractions around trying to spin off part of it or the
whole thing could certainly hinder its long-term growth
prospects” said West, whose firm advises the Buffalo Funds,
which oversee about $8 billion including EBay shares.
Sharing data between the services makes both the e-commerce
and online-payment businesses more competitive, Susquehanna
analysts Brian Nowak and James Friedman wrote in a report
yesterday.
Nothing New
Icahn isn’t telling shareholders anything new by
highlighting the potential benefit of a PayPal split, said Shipp
of Sterling Capital. Even so, Shipp said he prefers the long-
term rewards of keeping the company together to the short-term
boost that a breakup might bring.
“PayPal could trade at a higher multiple -- we know
this,” Shipp said. “There may come a day when it makes sense,
but I don’t know that we’re close to that day. It looks to me
like the integrated company is doing well.”
While there are some advantages to keeping EBay and PayPal
together, the manager of shareholder Jacob Internet Fund said
the case for splitting up is stronger. Retailers that may be
hesitant to use PayPal because it’s owned by their competitor
could choose to adopt the service if PayPal were independent,
Ryan Jacob said in a phone interview.
Win Faster
Investors will eventually give EBay credit for the value of
PayPal, though a breakup would accelerate that, said Daniel
Johnson, a Louisville, Kentucky-based money manager at River
Road Asset Management LLC, which oversees about $10.3 billion,
including EBay shares.
“We think we can win if it stays together, but we can win
a little faster if it gets split up,” Johnson said in a phone
interview.
Even if Icahn fails to spur a transaction, the added
pressure on EBay’s leadership benefits shareholders, according
to Sean Sun, an analyst at Santa Fe, New Mexico-based Thornburg
Investment Management Inc., which oversees $94 billion including
EBay shares.
"Having this activism is good because it probably gets
management more focused and brings to light the fact that the
company is undervalued,” Sun said in a phone interview. “I
don’t think the spin is going to happen without management’s
support, but just having Icahn in there can get them thinking.”
For Related News and Information:
Icahn at EBay Shows Boards Learning to Listen to Activists
NSN MZV5B76KLVR6
EBay Says Icahn Proposes PayPal Spinoff After Taking Stake
NSN MZV1QO6KLVSU
PayPal Increases Mobile Investment as Smartphones Replace Cash
NSN MXL7666S972A
EBay deal news: EBAY US TCNI MNA
Real M&A Columns: NI REALMNA
Top deal news: DTOP
--With assistance from Beth Mellor in New York. Editors: Beth
Williams, Sarah Rabil
http://www.bloomberg.com/news/2014-01-24/ebay-bets-paypal-in-house-beats-icahn-s-plan-real-m-a.html
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