eBay, PayPal to split into separate companies in 2015
The separation, brought up by activist investor Carl Icahn in January, will include new management teams for both businesses.
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Online auction house eBay said Tuesday it plans to split its PayPal unit into a separately traded company next year.
The separation will bring in two new leaders. Devin Wenig, eBay Marketplaces president, will become the new CEO of eBay. Dan Schulman, president of the American Express Enterprise Growth Group, will serve as the new CEO of PayPal.
Current eBay CEO John Donahoe and CFO Bob Swan will help with the transition but then no longer serve as executives at either of the companies. The split is expected to happen in the second half of 2015.
The move marks the end of what has been seen as an awkward partnership since eBay acquired PayPal for $1.5 billion in 2002. The deal was initially pitched as a way for eBay to boost PayPal transactions by driving auction participants toward the online payment service. But eBay itself apparently couldn't realize any significant merger benefits beyond pushing traffic.
"A thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively," Donahoe said in a statement. "The industry landscape is changing, and each business faces different competitive opportunities and challenges."
"It is almost a 'no brainer' that these companies should be separated to increase the value of these great assets and thus to meaningfully enhance value for all shareholders," Icahn said.
The move also represents a reversal of company rhetoric that the two businesses were better off together from just a few months ago, but is likely a response to the mounting shareholder pressure, according to Cowen & Co. analyst John Blackledge. He believes the spin-off makes sense it allows both sides to better focus on their respective competition.
eBay shares rose 8.2 percent to $56.95 in pre-market trading on Tuesday.
Another motivation of the split was the decreasing link between eBay and PayPal. eBay represents less than a third of PayPal's total payments volume, Donahoe said in a conference call with investors. He believes that volume will fall to 15 percent down the line. He added that he and the board explored the idea of a separation in 2008, but said it didn't make sense back then because eBay represented half of PayPal's payments volume.
eBay has grown from a simple auction house for used goods to a full-fledged marketplace. eBay said that it has 149 million "active buyers" and that its Marketplaces unit generated $8.7 billion in revenue over the last 12 months -- out of $9.9 billion in revenue for eBay as a whole. Meanwhile, eBay has been building up its Enterprise unit, which manages the online retail presence of other brands. eBay said it handled roughly $85 billion in gross merchandise volume in the last 12 months, which represents 13 percent growth year over year. Scott Schenkel, the CFO of eBay Marketplaces, will become CFO of the new company.
But the Marketplaces unit may struggle in what Canaccord analyst Michael Graham said is a challenging environment. The business is increasingly facing off against retailing giant. Amazon. Graham downgraded his rating on the stock, seeing limited upside for the shares.
PayPal, meanwhile, has grown from an online payments business to one that aspires to become your mobile wallet. The business has tinkered with ways for people to use PayPal for real-life transactions in addition to transferring funds online or through its mobile app. The company over the last three years has worked to build a larger presence on smartphones through mobile payments. In 2013, PayPal processed $27 billion in mobile payments out of a total of $203 billion in payments altogether.
eBay said PayPal has more than 152 million active registered accounts, with revenue over the last 12 months at $7.2 billion. That represents a growth rate of 19 percent over the previous year. PayPal handles one in every six dollars spent online today, eBay said.
But it too faces competition. It has struggled to turn itself into the preferred mobile wallet for consumers, and now faces competition from Apple's own mobile payment service, Apple Pay, which is expected to launch next month.
In light of new competition from Apple Pay, Icahn said he believes the payments industry needs to go through consolidation, with PayPal playing the part of potential acquirer or a participant in a merger with another strong player.
PayPal's incoming leader, Schulman, joins PayPal from American Express and boasts experience from both the payments and mobile world. Prior to his work at American Express, he was the CEO of Virgin Mobile and worked at AT&T and Priceline. He will serve as president of PayPal until the split occurs.
"Dan has a proven track record of leading complex technology businesses at scale, driving sustainable growth and understanding how to innovate to drive competitive advantage and deliver compelling experiences for customers," Donahoe said.
With two separate companies, eBay asserts that Wenig and Schulman can move more quickly to expand their respective businesses.
Donahoe dismissed the idea that the split would position one or both of the businesses for sale, saying both eBay and PayPal have "strong footprints and organic qualities going forward."
Updated at 5:36 a.m., 7:16 a.m. and 10:02 p.m. PT:To include additional executive comments from the conference call, analyst comments and from investor Carl Icahn.