EBay Inc. in January said “no” to billionaire investor and shareholder Carl Icahn’s proposal that it spin off its PayPal Inc. payments division, and now it is saying “no” once again.
The online marketplace today released a letter to shareholders asking them to reject Icahn’s more recent, slightly different proposal that it sell 20% of PayPal in a partial initial public offering of stock. It also asks shareholders to vote against two board members Icahn has proposed in favor of its four nominees, who are all current board members.
Over the last several months, Icahn has released a series of scathing letters attacking eBay board members and CEO John Donahoe, who Icahn alleges led the company to a $4 billion loss by mishandling the acquisition and subsequent sale of video communications company Skype. EBay has vigorously defended Donahoe and says eBay ultimately made a profit from the sale of Skype.
Icahn’s continued pressing that eBay separate PayPal stems from his dissatisfaction with the board. In a March 12 open letter to shareholders he writes that without better leadership, “PayPal may well go the way of other former technology greats such as Blackberry, Dell, Eastman Kodak, Polaroid, Nintendo, Xerox, Sony, Palm and AOL—the same way that Motorola Mobility may have gone had we not been able to convince Motorola’s board to bring in a new CEO and separate the companies—ultimately resulting in a sale to Google.”
By proposing a 20% spinoff instead of a full separation, Icahn says eBay will be able to preserve the “secret sauce” and “flywheels” that the companies have developed together while allowing PayPal more room to grow independently. The sale will also allow investors to better gauge each company’s value and allow each to have more focused, independent leadership teams, he says. Additionally, if PayPal were “armed with its own stock as currency,” the company would be able to attract more top talent to increase its competitiveness at a time when the payments industry is rapidly consolidating, he says.
EBay has said repeatedly that it and PayPal are better together. In today’s lengthy response to Icahn’s assertions—the e-marketplace’s most detailed rebuttal to date—its argument included several data points. For instance, over the last five years, eBay and PayPal have together increased share prices by 441%. The e-marketplace also says that “eBay delivers about 30% of PayPal’s new users at virtually no cost, more than 30% of PayPal’s revenues and approximately 50% of PayPal’s profits. PayPal’s growth and leadership in mobile payments has occurred precisely because of this strong base of PayPal users on eBay.” Its customer base provides a “strong foundation” for PayPal as the payments company expands into emerging markets, such as Brazil, eBay says.
The e-marketplace summarizes in its letter that it believes spinning off PayPal will not make PayPal more competitive, faster-growing or more valuable to shareholders, and that a separation will disrupt the payment company’s development “at a critically important time.” In response to the billionaire’s updated proposal for a partial sale of PayPal, rather than a full one, eBay writes, “We’re glad to see that Mr. Icahn now seems to agree that a full separation of PayPal is not a good idea.”
Meanwhile, in the board battles, both eBay and Icahn have claimed that each other’s nominees are unqualified for the job. Icahn cites Donahoe’s and the other board members’ alleged past failures with Skype and other “negligent” and “self-interested” moves that Icahn says put the company at risk. EBay says Donahoe’s nominees, Jonathan Christodoro and Daniel Ninivaggi, “have no relevant leadership or operational experience in technology” and both are beholden to Icahn and his affiliates, which will prevent their abilities to act as independent board members. Christodoro has joined four boards at the urging of Icahn, eBay claims, while Ninivaggi is co-CEO of Federal-Mogul Corp., an automotive and commercial supplier for which Icahn is the non-executive chairman of the board.
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