Isn’t It Icahnic? Carl Icahn Looks for PayPal Payday From Ebay

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With his public battle over Dell finished, Carl Ichan didn’t take too long in drumming up a new target. The famous corporate raider is now pushing eBay (EBAY) to spin off its online transaction business, PayPal, and submitted this idea for a non-binding vote at an upcoming shareholder meeting. Along with a spinoff, Mr. Icahn is also seeking to nominate two new members to the board, presumably people supportive of his ideas. It is worth noting that this is not a new idea and one of this site’s earliest articles was devoted to this very subject.

Although still a smaller segment than its core marketplace business and less profitable, PayPal is growing at a much faster clip prompting the calls for separation. It is also the leader in its space although new competitors like Square are gaining traction and nice valuations. Interestingly, it was the company itself who disclosed his plans, likely robbing us of another ‘breaking news’ tweet from the tech savvy investor. Mr. Icahn disclosed that he owns only ~0.82% of eBay’s stock which I think says a lot about the current environment for activist investors. Board members and institutional shareholders seem to have become much more receptive to activists’ overtures and ideas which in turn makes their jobs much easier. Of course, it hasn’t always worked so smoothly for Mr. Icahn.

The company immediately rejected the idea though and believes that there are significant synergies by keeping PayPal in house:

eBay’s Board of Directors has concluded that the company and its shareholders are best served by the current strategic direction of the company and does not believe that breaking up the company is the best way to maximize shareholder value.  As part of eBay Inc., PayPal is able to leverage the company’s technology capabilities, commerce platforms and relationships with retailers, brands and large merchants worldwide.  Payment is part of commerce, and as part of eBay, PayPal drives commerce innovation in payments at global scale, creating value for consumers, merchants and shareholders.

eBay’s CEO John Donahoe kept this theme going during the Q4 conference call noting that “when you separate two highly intertwined and highly performing businesses, it creates significant distraction and disynergies.” Disynergies! Definitely don’t want those. Companies often pull out the synergy line, sometimes dubiously, but it seems pretty reasonable in this case. While some analysts like the idea of Mr. Icahn getting involved at eBay, they don’t necessarily agree that a spin would be such a good move. This Forbes piece quotes analysts from Morgan Stanley, BGC and Wells Fargo who all seem to side with management.

The spin brouhaha coincided with eBay’s Q4 earnings release which saw the company miss on the sales side and give lower than expected guidance for Q1. The company did announce a new $5b buyback program though. Shares initially spiked on the news of Mr. Icahn’s plans, but eventually settled down. Mr. Icahn is a very determined investor and indicated he is willing to take this to a proxy battle. He likes to use the public arena to pressure companies so I expect this situation to get a lot more heated.

Disclosure: Author holds no position in any stock mentioned.

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