Wall Street generally applauded today’s announcement that eBay Inc. will spin off its PayPal payments unit, but some analysts believe each company could be an attractive acquisition target for big Internet companies.
Given the accelerating pace of acquisitions in technology and e-commerce “the separation of eBay and PayPal puts both businesses in play, which in our view could create substantially more value that our published SOTP [spin-off target price],” wrote Matt Nemer, an analyst at Wells Fargo LLC, today in a note to investors. He says the two companies separately will be worth 18% more in stock market value than eBay’s current value of about $65 billion.
Colin Sebastian, an analyst at investment firm Robert W. Baird & Co., also pointed to the possibility of eBay being acquired once the separation from PayPal is complete in the second half of 2015.
“We have argued before that eBay would make an attractive takeover candidate, and our view hasn’t changed with this news,” Sebastian says. “Commerce and payments are both hugely attractive markets, and companies such as Google and Alibaba have plenty of resources at their disposal if they choose to acquire more scale and market share.” EBay denied rumors earlier this month of a possible acquisition by eBay Inc. Alibaba Group Holding Ltd., the dominant company in Chinese e-commerce, went public this month on the New York Stock Exchange, raking in $25 billion in the largest IPO in history.
Danielle Bailey, an analyst at research and consulting firm L2 Think Tank, similarly raises the possibility of eBay being acquired by Alibaba, which would bring along its own online payment service, Alipay, essentially the Chinese version of PayPal. “I definitely see eBay’s attractiveness as an acquisition target increasing significantly. It would be an interesting play for Alibaba that could merge the marketplace with its Alipay mobile/online payment vehicle—mirroring the value proposition it offers in China and giving it an established brand from which to build its presence in the West.
“Separating PayPal makes it a potential target for larger players like Google, Amazon, Alibaba, and Microsoft (not to mention Visa/Mastercard), all of whom have tried to build online payment platforms with varying degrees of success.”
PayPal would be an attractive option for big companies seeking to establish a strong position in online payments, agrees analyst Youssef Squali of Cantor Fitzgerald. “Separating PayPal makes it a potential target for larger players like Google, Amazon, Alibaba, and Microsoft (not to mention Visa/Mastercard), all of whom have tried to build online payment platforms with varying degrees of success,” Squali writes in a note to investors.
Should PayPal remain independent, he adds, it would be free to offer its services to other marketplaces that compete with eBay’s, notably those of Amazon and Alibaba.
Sebastian says both eBay and PayPal will be well positioned to growth following their separation.
“This spinoff makes strategic sense, in our view, and will effectively create two large-scale Internet pure-plays, poised to benefit from scale, early leadership positions online, significant technology investments, and the freedom to compete more aggressively in constantly changing markets,” he says. He deems the deal particularly favorable to PayPal, which, he says, “will end up with a disproportionate amount of cash and none of eBay’s parent debt. Independent PayPal will be well capitalized and free to focus on key growth initiatives” without being concerned about their impact on eBay’s marketplace business.
He says the eBay marketplace faces strong competition from Amazon.com Inc., No. 1 in the 2014 Internet Retailer Top 500, and from Google Inc., which lets e-retailers drive traffic directly to their sites via search ads, rather than selling on marketplaces like eBay.
However, he notes that eBay marketplace sales have improved and that eBay is well positioned to benefit from more consumers shopping on mobile devices. EBay has been an early leader in mobile commerce and the Internet Retailer 2015 Mobile 500 projects eBay will generate $34 billion worldwide in mobile sales, up 70% from $20 billion in 2013.
Sebastian also says eBay will benefit from its integration of its marketplace business with the e-commerce technology companies it has acquired, notably GSI Commerce and Magento, and its marketing services unit.
While calling the spin-off “the right move for shareholders, analyst Michael Graham at Canaccord Genuity Group Inc. warned that eBay’s marketplace sales growth is slowing down and that “the operating environment for eBay remains somewhat challenging.”
He says the value of eBay’s marketplace business will depend in part on how effectively the new management can make use of the company’s financial assets and decrease costs, “and details around management intentions will likely not emerge for some time.”
EBay’s shares were up about 7% in mid-day trading today.
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