eBay and the declaration of PayPal's dependence
If Carl Icahn has turned the simple tweet into a weapon in proxy fights, his chief adversary at eBay is returning fire with an older, still formidable weapon: the CEO news interview. John Donahoe has been making the rounds at newsrooms arguing against Icahn's campaign to spin off PayPal.
When eBay reported its financial earnings, the company said companies controlled by Icahn bought a 0.82 percent stake of eBay in January. Icahn asked for seats on eBay's board and, most controversially, proposed the company spin off PayPal. Because Icahn had also been playing gadfly in Apple's boardroom, there was some speculation that he might agitate for a sale of PayPal to Apple.
Donahoe told investors in a conference call that he'd consider Icahn's proposals, that eBay had considered spinning off PayPal years ago when the divested itself of its regrettable purchase of Skype, but that PayPal and eBay made sense together for three key reasons: “First, eBay accelerates Paypal’s success. Second, eBay data makes Paypal smarter. And third, eBay funds Paypal’s growth.”
Donahoe then went around to several media outlets, hammering home this message by repeating it on CNBC, Fortune and Re/code and others. Apparently that wasn't enough because Donahoe appeared on Bloomberg today to once again explain why eBay should not spin off PayPal, with Donahoe largely sticking to the script he first read from in the earnings call.
One thing the latest interview shows is that this question isn't going away, not just because of Icahn's legendary stubbornness in pursuing his agenda, but because there are compelling arguments on both sides. In August, Sarah Lacy wrote about the cultural transformation that PayPal is seeing under David Marcus, acting less like a financial organization and more like a customer-focused technology company. Under eBay's ownership, that transformation will be much easier to carry out.
What more, eBay, as Donahoe pointed out, has been the commerce platform that prompted millions to create PayPal accounts, first in the US, then in overseas markets where eBay had a foothold before PayPal, and starting in 2010 on mobile phones.
PayPal is also an important part of the services that eBay is offering to offline retailers, a key area of eBay's recent growth. The global data eBay provides PayPal on its marketplace transactions helps reduce the risk that PayPal faces. And finally, in another point favored by Donahoe, spinning off PayPal makes less sense than ever because commerce and payments are moving together.
These are all strong points, but persuasive arguments exist on the other side as well. If the symbiosis between commerce and payments is strong at eBay, how much stronger would it be at a larger company like Apple? Thanks to iTunes, Apple has access to accounts and data on even more consumers than eBay does. Apple, which has nearly 600 million iTunes accounts, appears to be moving closer to a payments application, one that PayPal has reportedly been jockeying to support.
From a shareholder perspective, an independent PayPal could reap a higher market value since its 19-percent revenue growth outpaces the 12-percent rate of eBay's marketplaces. David Sacks, a former PayPal executive, said he thought PayPal could be a $100 billion company on its own. A UBS analyst suggested eBay could sell off part of PayPal for $8 billion and give that back to shareholders. Some people sell their blood to pay their bills. This proposal is the same idea to help eBay generate returns for shareholders.
Whatever the value of a PayPal spinoff, the debate underscores an emerging rift between the thinking of technology companies in Silicon Valley and the shareholder-return demands of Wall Street. Once tech companies see growth rates slow to low double digits, they stop being seen as growth companies and shareholders push for more buybacks and dividends.
That is inevitable, but it also hampers the ability of tech executives to reengineer their companies from slow-growing value plays to companies jumpstarting growth with innovation – the kind of transformation that PayPal has been seeing. Tech turnarounds are rare, but eBay is one recent example.
Amazon's revenue grew 20 percent last quarter. If it slows further, one could argue that the company should be broken up into the core retail site, a Netflix-like streaming service, a cloud-services company named AWS, and a manufacturer of Kindles. Broken off into pieces, the market value each unit may theoretically be worth more than Amazon's total value, but by dismantling the growth strategy Jeff Bezos has painstakingly created over the past 15 years, Amazon could be crippling years of potential growth.
Which is why the most interesting interview Donahoe gave today wasn't with Bloomberg but in a return visit to Fortune's offices. The eBay CEO said he's been in conversations with Tim Cook, Reed Hastings and Michael Dell, three CEOs who in recent years have had boardroom brawls with Icahn.
Instead of letting themselves be ganged up on by Icahn and the companies he controls, tech companies could unite in keeping him at bay. Such an effort could mean less capital being squeezed from aging tech companies, but also leave them to focus on what they do best, which is run their businesses.
[image via thinkstock]