Business

eBay Board Pumps Up Volume in PayPal Clash

eBay’s board of directors this week urged shareholders to reject Carl Icahn’s plan to spin off PayPal as a separate company.

“Our shareholders and our customers are best served by keeping PayPal and eBay together,” the board said in a letter to investors. “No other payments competitor has achieved PayPal’s success — because no other competitor has had a commerce platform like eBay.”

The eBay board narrowed down its decision to a few core reasons: eBay accelerates PayPal’s growth and success; sharing data results in more profitable growth; eBay provides PayPal with efficient capital; and commerce and payments are converging.

Commerce, Payments Leader

eBay is a commerce and payments leader in a quickly evolving marketplace, and the line between online and offline commerce is vanishing, the board noted, while mobile commerce changes consumer behavior.

Scalable, flexible and integrated digital commerce and payments platforms are important competitive advantages in the current landscape, it argued.

eBay is in a strong position as a global leader and innovator to drive long-term growth and provide sustainable value to shareholders, the board therefore claimed.

Investor Icahn offered a nonbinding proposal to turn PayPal into its own publicly traded company and nominated two of his employees to eBay’s board.

After carefully examining Icahn’s proposal, the eBay board said — noting that it had considered the suggestion in the past — it did not support his suggestions.

Financial Evidence

The board underlined the effectiveness of PayPal and eBay operating in tandem through its financial results. In the last five years, the companies have increased share price by 441 percent. In 2013, eBay saw US$22 billion and PayPal $27 billion in mobile commerce volume. Revenue grew by 14 percent year-over-year, while non-GAAP earnings per share grew by 15 percent year-over-year.

The board underlined the synergy between the two platforms by noting PayPal’s growth through eBay’s services. It noted that eBay delivers around 30 percent of new PayPal users, more than 30 percent of PayPal revenue, and around half of PayPal’s profits.

The board urged shareholders to vote down Icahn’s proposal and to reject Icahn’s two nominees to eBay’s board owing to a lack of experience.

Icahn recently has distanced himself from his own proposal, it noted, in favor of a “carve-out” initial public offering of PayPal instead of a full spinoff.

Icahn last week called for eBay to sell off 20 percent of PayPal in an IPO.

20 Percent Solution

“Without question, eBay and PayPal are leaders in their respective markets,” said Jordan McKee, a mobile marketing and commerce analyst at Yankee Group.

“Much of this success is owed to the many synergies that exist between the companies. Payments and commerce are becoming inextricably intertwined, and as a result, the benefits PayPal and eBay enjoy from their relationship will only increase. This symbiotic relationship gives both entities a highly unique and advantageous position in the market that no other competitor enjoys,” he told the E-Commerce Times.

“The growing impact of mobility on the overall shopping journey will continue to expose the many advantages in the years ahead,” McKee continued.

“While I would agree that on the surface it may seem a bit peculiar for an auction company to own a global payments company, looking under the hood at the underlying dynamics of both organizations makes the value of the relationship apparent,” he explained.

‘Weakened Argument’

“Carl Icahn’s revised proposal for partial spinoff of PayPal from eBay appears to have significantly weakened his initial argument,” said David Cadden, a professor of entrepreneurship and strategy at Quinnipiac University.

“Many analysts believe that PayPal and eBay may be one of those rare cases where the dreaded word ‘synergy’ actually works,” he told the E-Commerce Times.

“This would mean that there’s no benefit in either total or partial spinoff. What initially looked like a sincere attempt to improve the management of PayPal — because it would be a separate entity — now looks like an opportunity for a quick kill from a short-term investment.”

The possibility of PayPal becoming an independent company, which now seems somewhat remote, raises intriguing questions about its governance and future.

“Traditionally governance has been difficult to explain to individual shareholders, but they do understand — and will be dismayed by — allegations of insiders enriching themselves at the expense of ordinary investors, as well as allegations that competitors benefit from inside information,” Andrea Belz, principal of Belz Consulting Group, told the E-Commerce Times.

“Icahn’s actual proposal is interesting,” said Belz, “because it asks the fundamental question: Does eBay want to be a bank, and what is a bank today? If PayPal is spun off as an independent bank, how will it be regulated, and what does it mean for the future of the banking industry?

“Should eBay and PayPal be managed by the same board if they are in fundamentally different businesses, and could they each present more opportunities — and more shareholder value — operating under a narrow partnership instead?” she wondered. “These are major strategic questions that speak to the future of Internet commerce.”

Kris Holt is a writer and editor based in Montreal. He has written for the Daily Dot, The Daily Beast, and PolicyMic, among others. He's Scottish, so would prefer if no one used the word "soccer" in his company. You can connect with Kris on Google+.

3 Comments

  • Paypal is one of the best option to do internal transaction to be as payment gateway include excellent service. It help more for ecommerce website to provide best service for their customers.

    • I don’t know how you are using PayPal and what you are comparing there charges to. I can only add my two cents worth as a Canadian merchant that started using PayPal several years ago as our credit card payment processor for our E-commerce websites. We not only achieved significant savings on processing fees for credit card transactions we also saved a lot of time on bookkeeping as their statements are simple and straight forward compared to what we were receiving from our bank. Concerning exchange rates, I compare them from time to time with my bank and they have always been better. I don’t know how things work on E-Bay but as a payments processor I AM happy with their service.

  • Paypal is in all reality a global bank which straddles every frontier on the planet. Not only are they regulated only by their own business interests, but they impose their own set of rules and regulations to your money and you have absolutely no recourse, no appeal process, no hope in hell, when they decide to take your money away from you, as is happening more and more.

    It’s not enough for the Paypal/Ebay conglomerate to milk users of outlandish fees which when tallied up especially in foreign currency conversion transactions can exceed 10% of the total sale. They have to carry on their business based on a platform whereby they exercise ultimate power over your money, and that is clearly unacceptable. The argument that you can deal with a competitor is the same monopolistic talk we’ve heard from Microsoft for decades. There is no effective competitor as you either deal with Paypal/Ebay or you are stuck with junior league fudge factories.

    That’s why it’s time that Paypal/Ebay be split up, just like Ma Bell was turned into lots of Baby Bells a couple of decades ago. Let them compete in the open marketplace and offer reasonable fees and considerate customer treatment. In April 2008, eBay and Paypal (which in 2002 became a wholly-owned subsidiary of eBay) began to hold buyer payments from sellers in order to implement a 21-hold policy on funds. This hold was also placed for sales where it is clearly stated in the auction listings that (especially for custom and made-to-order items) shipping is within a certain (but not immediate) time frame.

    Not only are sellers, who state their selling parameters clearly within their listings, being penalized for not having "ship same day" items, but Paypal stands to profit from interest on funds that do not belong to them.

    For at-home, small business owners, this unscrupulous practice by both eBay and Paypal (which are one in the same) is an economic hardship. Sellers are expected to ship items to buyers without, essentially, being paid for their items. The buyer has their items long before (up to 21 days) a seller receives payment. During this time, selling and store fees accrue by eBay and expect to be paid even when the seller’s fees are tied up. If tied to a Paypal account, eBay will still initiate a withdrawal, which instead of coming from an available Paypal balance will now come from personal funds (checking account or credit card).

    eBay has initiated "options" to avoid the holds, which, again for custom-work sellers, does not work. For others, it requires the purchase and printing of UPS and USPS labels and postage via the internet and personal printers to prove shipping, which is not only time consuming but expensive and environmentally wasteful.

    Clearly, eBay and Paypal are preying on the small business owner to earn interest on funds that do not belong to them, in order to cover their own losses in an economic downturn.

    Because eBay and Paypal and subsidiaries, they can apparently make up their own rules that are not (and would not) be practiced between any other merchandise and banking venue.

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