eBay CEO Says Icahn PayPal Spinoff Makes No Sense

For once, eBay CEO John Donahoe may have reason to be thankful for two of his company’s competitors, Amazon and Square.

On Wednesday, eBay revealed activist investor Carl Icahn had snatched a significant stake in the e-commerce and payments company and demanded the spinoff of PayPal, the eBay payments unit whose revenue grew 19 percent in the fourth quarter.

To no one’s surprise, eBay rejected the request. Breaking it apart undercuts a broadly held belief that payments and commerce are moving closer, not further apart.

“You’ll notice that other commerce companies, large and small, are trying to expand into payments,” Donahoe said in an interview with Re/code on Wednesday evening. “And there are some payments companies that are now trying to get into marketplaces and get into commerce.”

“I’d say commerce and payments are converging, not diverging,” Donahoe added.

Look no further than rival Amazon to back up Donahoe’s thesis. Amazon’s e-commerce prowess has been mismatched by its on-again, off-again focus on its payments business, but that’s about to change.

In the fall, the company unveiled a product called Login and Pay with Amazon, which is a mashup of two of its existing products that, together, make it quick and easy to buy stuff on websites outside of Amazon by logging in with your Amazon username and password.

According to industry sources, 2014 is supposed to be a bigger year in the payments world for Amazon as it works its way into the payment systems at brick-and-mortar stores as well. Possible goals of this initiative could be to gather store sales data to better target products to online Amazon shoppers as well as hooking brick-and-mortar merchants into using some of Amazon’s logistics services.

On the other side, Square is likely the payments company that Donahoe was referencing. Jack Dorsey’s startup, which is best known for the credit-card reader and point of sale app, which lets small business owners accept credit card payments through a smartphone, unveiled an e-commerce marketplace known as Square Market over the summer.

Square has pitched the idea as a simple way for local businesses without a strong e-commerce presence to start selling goods to people who live far away. And since Square handles payments for its customers’ online shops, too, it’s a way to, at least in theory, simultaneously help a customer increase sales while boosting Square’s revenue per customer along the way.

With competition coming from both sides, Donahoe said now would be a terrible time to break up the company. After all, eBay is responsible for more than 30 percent of PayPal’s revenue and more than 50 percent of its profits, the company disclosed.

One can also argue that PayPal is eBay’s best asset; it’s no wonder that eBay management and its board do not want to lose it. PayPal revenue currently comprises 40 percent of eBay’s total revenue. And, according to at least one analyst — R.W. Baird’s Colin Sebastian — more than half of eBay’s market value should be attributed to PayPal.

So what happens next? Icahn said in an interview with Bloomberg TV that he’ll submit a proposal to shareholders on the spinoff; such a vote usually occurs at a company’s annual shareholder meeting. eBay’s typically occurs in April. A vote isn’t binding, but a good showing for Icahn’s idea could put pressure on eBay’s board.

Icahn didn’t, however, provide much detail on his proposal beyond saying it was a “no-brainer” and that eBay hasn’t performed as well as its competition in the last year. “I think the multiple would go up dramatically and also the health of the company would be better,” he said referencing PayPal. In short, the thesis is that PayPal would be valued higher by Wall Street if it were a separate company.

In the interview with Re/code last night, Donahoe said he thinks his company will ultimately be protected from Icahn’s advance because the benefits eBay provides for PayPal speak for itself.

“eBay’s data makes PayPal smarter and eBay funds PayPal’s growth,” he said.

This article originally appeared on Recode.net.

Will you support Vox’s explanatory journalism?

Most news outlets make their money through advertising or subscriptions. But when it comes to what we’re trying to do at Vox, there are a couple of big issues with relying on ads and subscriptions to keep the lights on:

First, advertising dollars go up and down with the economy. We often only know a few months out what our advertising revenue will be, which makes it hard to plan ahead.

Second, we’re not in the subscriptions business. Vox is here to help everyone understand the complex issues shaping the world — not just the people who can afford to pay for a subscription. We believe that’s an important part of building a more equal society. And we can’t do that if we have a paywall.

So even though advertising is still our biggest source of revenue, we also seek grants and reader support. (And no matter how our work is funded, we have strict guidelines on editorial independence.)

If you also believe that everyone deserves access to trusted high-quality information, will you make a gift to Vox today? Any amount helps.

One-Time Monthly Annual

$5/month

$10/month

$25/month

$50/month

Other

$

Yes, I'll give $5/month

Yes, I'll give $5/month

We accept credit card, Apple Pay, and Google Pay. You can also contribute via