Activist effect: eBay to be split into three parts, laying off 7% and giving Icahn another board seat

By Michael Carney , written on January 21, 2015

From The News Desk

The unbundling of eBay that began with a protracted dispute with activist shareholder Carl Icahn could see the company split into three units, rather than just two, management announced today. The move would result in a standalone PayPal, as well as independent eBay Marketplaces and eBay Enterprises businesses.

"Enterprise is a strong business and a leading partner for large retailers, managing mission critical components of their e-commerce initiatives," the company said. "However, it has become clear that it has limited synergies with either business and a separation will allow both to focus exclusively on their core markets."

EBay revealed its plans in conjunction with its Q4 earnings report, which saw the company generate $0.90 per share in earnings, beating analyst estimates of $0.89 per share and representing 10 percent growth over the year-ago quarter. The company, however, slightly underperformed on net revenue, missing consensus estimates of $4.93 billion by $10 million. EBay shares traded up 2.74 percent today on heavy volume, but are down 0.56 percent from that level in after hours trading.

"In a year of unexpected events and distractions, we ended 2014 with double-digit revenue growth, solid earnings growth and strong cash flow, reflecting the fundamental strengths of our company," CEO John Donahoe said in a statement.

In addition to the divesting of its enterprise business, a unit through which it manages the ecommerce businesses of other companies, eBay announced that it would lay off 2,400 employees in conjunction as part of the restructuring, representing 7 percent of its global workforce. This is actually less than the 3,000 layoffs estimated at the time of the original PayPal spinoff announcement, however it will still cost the company between $350 million to $400 million in restructuring costs across 2015.

EBay will also allow Icahn to appoint an additional board member in Icahn Capital MD Jonathan Christodoro. Christodor will join two newly appointed directors of eBay’s choosing, Wellington Management CEO Perry Traquina and CamberView Partners founder Frank Yeary.

Icahn was understandably pleased with the news, tweeting:

— Carl Icahn (@Carl_C_Icahn) January 21, 2015 In the linked letter, Icahn writes:

We believe the actions of eBay’s board and management in crafting this agreement with us have marked a large step forward for corporate governance. The company reached out to us recently to discuss value enhancement generally, and our constructive conversations led to the mutual development of a governance structure going forward that we believe will better align the interests of shareholders, directors, management and other stakeholders.
Icahn went on to outline several newly implemented corporate governance provisions related to an independent PayPal, including the implementation of a poison pill clause, change of control provisions, board composition provisions, rules agains super-majority voting, and competitive bidding stipulations.

In addition to the restructuring and board additions, eBay authorized $2 billion in additional share buy-backs, on top of $1 billion in remaining buybacks still outstanding under an existing program.

The problems facing an independent eBay are many, but most fundamentally the company has seen growth slow to a crawl. The company’s marketplaces revenue grew just 1.3 percent quarter on a year over year basis to $2.3 billion, while its gross merchandise volume grew an equally anemic 2 percent. This is comes as little surprise given that the company previously announced weak holiday sales, but it marks the company’s worst holiday quarter growth since 2010. EBay forecast just $4.35 billion to $4.45 billion in Q1 revenue, well short of analyst predictions of $4.71 billion.

The lone bit of good news for the division is that Marketplaces gained 2.9 million new buyers in the most recent quarter and 14.9 million on the year – a rise of 11 percent to 155 million – meaning that it’s not just legacy customers that are using the platform.

As it has in the past, the company cited changes in SEO (aka, Google not playing nicely) and password and security issues as reasons for the platform’s slowing growth. The problem is, once a company has lost consumer trust and been replaced as the go-to solution for a given problem, it’s extremely difficult to regain that business. A standalone EBay Marketplaces will need to prove to Wall Street that it can reignite its stalled growth engine. The company is already the subject of acquisition rumors with potential suitors including Alibaba and Amazon, among others.

PayPal, on the other hand, will need to demonstrate that it can maintain and even extend its current levels of growth and profitability without the cover of a giant marketplace owned by its parent company. This is especially true as the company faces increased competition in the payments space from a range of companies including Apple, Amazon, Stripe, Square, Walmart-backed Current, and others.

PayPal reported 24 percent growth in its net total payment volume during the quarter and 25 percent transaction growth, while adding 4.6 million new active registered accounts to reach 162 million globally. The eBay-owned payments unit great quarterly revenue to $2.2 billion.

What we’re seeing today is the reckoning of an aging giant. EBay, the ecommerce platform is quickly losing relevancy in an on-demand, mobile-first, and highly-personalized world. The company has been badly outmaneuvered by not only Amazon, but vertical specialists like Etsy, Wayfair, Zulilly, Fanatics, and others.

On the other side of the house, PayPal remains relevant by the sheer force of its scale and the incredibly difficult proposition of building a competing online payments platform. But with mobile commerce quickly growing in importance, it has only been through the acquisition of Braintree (and subsidiary Venmo) that the company has remained competitive.

Some, including the company’s founders Max Levchin, Elon Musk, and Peter Thiel, point to the anchor of eBay as an overlord as part of the problem. This was also cited as the reason for former CEO David Marcus’ sudden departure. But whatever the reason, PayPal has largely underachieved given its market position and is at a critical juncture today. Facing increasing competition and a changing financial services landscape, PayPal needs to prove it can still innovate and that it can turn its scale into an advantage, not a burden.

Icahn and others are betting that by separating PayPal, eBay Marketplaces, and eBay Enterprises, the collective value of these independent businesses and their long-term growth potential will be greater than the current sum of these parts. PayPal appears the best positioned to deliver on this belief, but it wont be easy. For Marketplaces and Enterprise, it looks increasingly like these units are being sent off to pasture. Surely the ecommerce businesses are worth something, but it’s unlikely we’ll see them deliver the kind of growth and upside traditionally associated with technology companies.

We’re still several quarters from these moves fully coming into effect and the potential for a few curveballs, such as acquisition offers, to further mix things up. Carl Icahn got his wish and then some when it comes to breaking up eBay into parts. Whether it proves to be a win for all shareholders, it’s still too early to tell.