A 5-year operating agreement is in the works to ensure an independent PayPal has revenue.

(Bloomberg)—PayPal will be guaranteed a reliable source of revenue after the payments service separates from eBay Inc. later this year.

The businesses are drawing up a five-year operating agreement in preparation for the split, which was announced six months ago and is scheduled to be completed by the end of this year, eBay said in a statement Thursday. The names of initial board members after the separation were also announced.

An independent PayPal will be freed up to forge alliances with retailers and other financial firms, as Google Inc. and Apple Inc. seek to turn their products into tools for digital payments. EBay’s marketplaces business, which is facing competition from Amazon.com Inc. and Alibaba Group Holding Ltd., has seen revenue growth lagging PayPal, which it bought in 2002.

The goal of the contracts is to provide stability and flexibility for each company after the split, eBay CEOe Officer John Donahoe said in an interview. The plan was designed so that each enterprise could survive on its own, even if either company was acquired by a competitor, he said.

“The guiding principles are continuity for eBay customers—merchants and consumers—as well as synergies and strategic flexibility,” Donahoe said in an interview.


Donahoe will chair PayPal’s board. EBay director Thomas Tierney will become chairman of the online marketplace. EBay’s current chief financial officer, Bob Swan, will also join the board of the marketplace business, the company said.

Pierre Omidyar, eBay’s founder, will be a director of both companies after they separate. Additional board announcements will be made in the coming months, eBay said.

Acquisition contingency

The agreement prevents eBay from forming a payments service and bars PayPal from developing its own online marketplace for physical goods, Donahoe said. EBay could change its payments strategy if PayPal is bought by an eBay competitor, he said. In that event, eBay would have to give PayPal 15 to 21 months notice. Donahoe declined to name potential acquirers. The companies will continue to share data to prevent fraud and provide customer service.

One provision aimed at ensuring PayPal’s stability is a target for eBay to have 80% of some transactions conducted via PayPal. EBay will pay PayPal a penalty if commerce dips below that threshold. Additionally, PayPal will hand over cash for transactions above that level, the companies said.


The agreement is intended to provide predictable income as each company considers partnerships with competitors of the other, Donahoe said. For instance, PayPal could offer payment- processing services to Amazon, while eBay could let its 155 million shoppers pay for merchandise using Apple Pay.

Separation agreement

Donahoe said the agreement would not change PayPal’s 2014 operating income by more than $50 million, an amount he called insignificant to investors.

EBay, based in San Jose, Calif., announced the split last year after activist investor Carl Icahn said PayPal was being held back by being put together with its parent’s slower-growing business.

Dan Schulman, who joined PayPal from American Express Co., will be CEO of the standalone company, eBay said when the separation was announced. Devin Wenig, currently president of eBay’s marketplaces, will become that business’s CEO after the breakup.