On Wednesday after the close, eBay disclosed that Carl Icahn has proposed a spin-off of PayPal from eBay. The initial reaction of the stock market was euphoric, with eBay stock jumping to $61.30 in after-hours trading from its closing price of $54.41. Not so fast, even though in my view Icahn is the most successful investor of recent years.
The concept behind Icahn’s proposal is nothing new. On the surface it makes sense to spin-off fast growing PayPal from slower growing eBay, but consider these five points.
Synergies
There are considerable synergies between PayPal and eBay. About one-third of PayPal’s new accounts in the fourth quarter came from eBay. In 2013, about 50% of PayPal’s new mobile accounts came from eBay.
eBay has tightly integrated PayPal with its marketplace and is attempting to use this tight integration as a tool to compete with Amazon.com. These synergies may be lost is a spin-off of PayPal occurs.
Cheap Source Of Funding
eBay is a cheap source of funding for PayPal. eBay is not charging PayPal for the new accounts it contributes and it is plowing about half of its profits into PayPal. It may come as a surprise to the casual observer that eBay is aiming to make PayPal bigger than its own main marketplace business in the not too distant future.
World Class Board
Carl Icahn has done well by investing in companies such as Chesapeake Energy CHK, where the corporate governance was poor. However, eBay has a world class board of directors, and the board is set against a spin-off of PayPal…Read more at Forbes
