The two firms will become independent publicly traded companies in 2015. The move follows pressure from investor Carl Icahn to spin off the payments arm.

PayPal Inc. will become its own publicly traded company next year, eBay Inc. said today.

The move will enable the two new firms to “capitalize on their respective growth opportunities in the rapidly changing global commerce and payments landscape,” eBay says. The announcement follows a push by billionaire investor and eBay shareholder Carl Icahn that eBay spin off PayPal, an effort that produce heated talk on both sides and which most recently led to a “truce” earlier this year. 

According to data from Top500Guide.com, PayPal provides payment services for 89 retailers in the Internet Retailer Top 500 Guide and 120 in the Second 500 Guide. And in North America, 116 Top 500 and 52 Second 500 merchants use PayPal Express. PayPal Express Checkout completes the process of a PayPal purchase on the retailer’s site, rather than the PayPal site, and provides deeper integration with a retailer’s order management system.

Additionally, 81 Top 500 merchants and 37 Second 500 merchants report selling on the eBay online marketplace.

EBay in the second quarter reported year-over-year U.S. sales growth of 12% and an 8.6% increase in net revenue for eBay marketplaces, to $2.17 billion. The Q2 financials also showed a continuing growth in mobile shopping, with eBay saying it had attracted 6.6 million new mobile customers during the second quarter, compared with 6.5 million gained in the first quarter of 2014, and that 59% of eBay buyers in the second quarter shopped eBay on more than one screen.

advertisement

PayPal, meanwhile, reported a revenue increase of 19.8% year over year to $1.95 billion. PayPal’s payment volume grew 28.6% to $55.05 billion. During a conference call today, eBay executives said the online marketplace represents less than 30% of PayPal’s total payments volume, a percentage expected to decline to 15% within three years. PayPal, meanwhile, accounts for 80% of the payments on eBay.

“eBay and PayPal had a strong reinforncing relationships over the last 12 years,” says EBay president and CEO John Donahoe during that call. But he added “that the syngeries, while important today, will naturally decline over time as PayPal’s business off eBay grows faster than on eBay.”

The move seems to make sense for PayPay, says Forrester Research Inc. analyst Denee Carrington. “The payments landscape is hyper-competitive, the pace of change is accelerating and everyone is gunning for PayPal,” she says. “The split will give PayPal greater agility to help it achieve its full potential.”

In the long-term this separation will also be good for online retailers, as it will make eBay more nimble at a time of big changes in e-commerce, says Scot Wingo, CEO of ChannelAdvisor, which helps retailers sell on web marketplaces like those of eBay and Amazon. “The marketplace can focus faster on e-commerce, which is a stated goal of theirs and they haven’t’ been achieving it,” he says.

advertisement

Apple Inc.’s recent introduction of mobile payment system Apple Pay, an instant competitor to PayPal, might have something to do with the split, Wingo adds. He says eBay wants to focus on being better for its sellers, and accepting Apple Pay might be one way to do that, but eBay could never accept Apple Pay as long as it was attached to PayPal.

The split will also benefit PayPal, Wingo says, as it will have the freedom to work with eBay competitors and potential competitors, such as Google Inc., whose search results pages increasingly offer the similar product selection to a marketplace like eBay. “PayPal has to be able to work with Google if they build a marketplace and they can’t do that being 100% married to eBay,” Wingo says.

Overall, Wingo says the move likely was prompted by the rapid evolution of e-commerce more than pressure from investors like Icahn. “While there has been shareholder activism around this topic,” he says, “I believe that the overwhelming reason for the split is market changes, technology acceleration (mobile/cloud) and a tectonic change in the competitive landscape.”

The separation of the two longstanding e-commerce players will elevate eBay president of marketplaces Devin Wenig to CEO of the new eBay company, which the online marketplace expects to complete its separation in the second half of 2015.

advertisement

Dan Schulman, president of the enterprise growth group for payment card network American Express Co., will lead the new PayPal as president and CEO.

Donahoe and chief financial officer Bob Swan will supervise the separation and take spots on the boards of both companies. They will not, however, have executive roles once the two companies separate.

Earlier this year, Icahn said he wanted to sell 20% of eBay’s PayPal payments division in an initial public offering. In the previous months, Icahn had released a series of scathing letters attacking eBay board members and Donahoe of leading 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. 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 deal’s structure should create a financially healthy independent PayPal, says Colin Sebastian, an e-commerce analyst at investment firm Robert W. Baird & Co. “Our sum of the parts analysis suggests that PayPal is the most valuable part of eBay Inc., and the spin-off proposal seems geared to optimize the value of payments, with plans to capitalize PayPal’s balance sheet and saddle it with none of eBay’s debt,” Sebastian says.

advertisement

It also raises the possibility of a takeover of eBay, he says.

“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, whose online marketplace sells everything from motorcycles to golf clubs via auctions and at fixed prices, bought PayPal in 2002 to add online-payment services. The unit, whose sales almost tripled sales in the five years ended in 2012, has since become a growth engine for the company. Under David Marcus, who left in June to join Facebook Inc., PayPal expanded its mobile services.

The split may value PayPal at $47 billion, applying a multiple of 1.8 times trailing 12-month revenue–similar to Amazon.com Inc.’s–to EBay’s marketplaces and advertising businesses, Bloomberg Industries analysts Praveen Menon and Paul Sweeney said. PayPal’s superior growth rate and unlocked value may explain the reasoning behind the separation, they wrote.

advertisement

The move isn’t designed to make either unit up for sale, Donahoe said on a conference call today. He added that eBay will keep its eBay Enterprises unit, the e-commerce technology and services unit created after eBay bought GSI Commerce for about $2.4 billion in 2011. According to Top500Guide.com, the unit provides e-commerce platform services to 23 merchants in the Internet Retailer Top 500 Guide and eight merchants in the Second 500 Guide. Those numbers increase to 57 Top 500 merchants and 72 Second 500 merchants when including eBay-owned Magento.

(Bloomberg News contributed to this story.)

Please check back at InternetRetailer.com throughout the day for much more coverage of this news from our reporting team. Or follow @ThadRueterIR on Twitter for links to those coming stories.

Favorite

advertisement