Ebay To Break Up With PayPal, Icahn Pushes For Payments Consolidation

PayPal, the faster-growing side of the business, will be run by former American Express executive Dan Schulman, who joined the company this year, while Ebay Marketplaces president Devin Wenig will helm that side of the business. Current Chief Executive John Donahoe and CFO Bob Swan will serve on the board of one or both of the post-breakup companies.

Earlier this year, PayPal chief David Marcus decamped for Facebook, prompting fresh questions about whether the payments business would be better off on its own with a separate compensation structure and publicly-traded currency for dealmaking outside of Ebay.

Over the last 12 months, PayPal has $7.2 billion in revenue to Ebay’s $9.9 billion, but that figure is growing at a 19% clip to Ebay’s 10%. Transaction volume on PayPal is twice that of Ebay, 26% to 13%.

The plan is to execute a tax-free spinoff in the back half of 2015, a transaction that Icahn pushed in a contentious battle with the company this year. After meeting with staunch resistance from the company, Icahn agreed to back off in return for the ability to recommend a board member the company accepted.

In a statement following Tuesday morning’s announcement, Icahn cheered the move while poking management about their timing.

“We are happy that eBay’s board and management have acted responsibly concerning the separation – perhaps a little later than they should have, but earlier than we expected,” Icahn wrote. That wasn’t all though, as he suggested the next step is for PayPal to either roll up or merge with other players in the payments space, an industry that is ripe for consolidation.

 “[I]n light of the development of strong competition such as the advent of Apple Pay, the sooner these consolidations take place, the better,” he wrote.

KBW analyst Sanjay Sakhrani wrote in a note to clients Tuesday that the split doesn’t come as a shock given the activist push from Icahn, but more importantly given the “challenging operating environment and heightened perceived competitive threats.” The latter is a reference to Apple's new Apple Pay platform, unveiled at the company’s recent product launch in early September.

Sakhrani figures 45% of KBW’s price target is attributable to PayPal — meaning the business is worth about $30 per share, and that a standalone PayPal, like a standalone Ebay, could be more easily digestible for a potential acquirer.

Citi analyst Mark May suggests an independent PayPal could warrant a higher multiple given its faster growth and the fact that its separation could have a “re-invigorating” effect.

A more cautious take came from Canaccord Genuity analyst Michael Graham, who downgraded his rating on Ebay shares to hold Tuesday. Graham writes that the gains on the spinoff announcement limit further upside, and fears that the marketplace business may struggle once it is cleaved off from PayPal. On that front, the ability to “increase financial leverage and reduce expenses” will be critical for the marketplace segment, and questions about both won’t have answers for some time.

Shares of Ebay, halted ahead of the breakup news Tuesday morning, jumped 11% when pre-market trading resumed. An hour after the opening bell the stock was up 6.7% at $56.19, nudging the stock into positive territory for the year.