Why EBay, PayPal Split is a Bad Move

By: Bloomberg

John Donahoe, CEO of eBay, spoke with Bloomberg Television's Trish Regan and Matt Miller about investor Carl Icahn's proposal that the company's PayPal online payments unit be split off and EBay's competition and strategy.

On how eBay and PayPal can be most successful, Donahoe said: "I continue to believe the best way is together, that eBay makes PayPal stronger. And it makes PayPal stronger by helping it grow faster, it provides more data, and it provides a strong financial foundation that will ultimately make PayPal more successful as part of eBay than separate."

TRISH REGAN: Last month, activist investor Carl Icahn proposed eBay split off its online payments unit, PayPal. I spoke to Mr. Icahn about his proposal. Here's what he had to say.

(VIDEO PLAYING)

CARL ICAHN, CHAIRMAN, ICAHN ENTERPRISES: There's no reason they should be together at this point in our opinion. In fact, I think it would be helped by a management team that is separate and can go their own way. And I think the multiple would go up dramaticaly, and also the health of the company would be better.

(END VIDEO)

REGAN: eBay CEO John Donahoe is here with us now to answer some of these questions. John, a pleasure to have you in studio.

JOHN DONAHOE: Nice to be here.

REGAN: Let's talk about what Carl is proposing. Right now almost half your business, roughly 41 percent of it, comes from PayPal. Why not spin that off?

DONAHOE: Well we look at this every year. We look at how eBay and PayPal can be most successful, and the board and I continue to believe the best way is together, that eBay makes PayPal stronger. And it makes PayPal stronger by helping it grow faster, it provides more data, and it provides a strong financial foundation that will ultimately make PayPal more successful as part of eBay than separate.

MATT MILLER: Look, there's no question that eBay and PayPal go together. I'm a huge eBay user and PayPal makes the whole process so much easier and more pleasant, and you don't even notice. But why - even as a spun-off company they could still cooperate, couldn't they, just as closely as they do now?

DONAHOE: But not integrated as tightly as they are now. Let's just give me - let me give you an example. Mobile payments. Mobile's the most important platform shift that's happened arguably in the last decade. When mobile first started, no one would have downloaded a PayPal mobile app. But 100 million people downloaded the eBay mobile app. And the only way to pay on the eBay mobile app was PayPal. And that's what allowed PayPal to start what was initially $600 million of total mobile payments volume in 2010 that then has grown to $27 billion of mobile payments last year.

REGAN: But John, when you look at this, you actually see that 70 percent of PayPal's revenue - 70 percent of PayPal's revenue is on the non-eBay platform, and that's growing at 30 percent. In comparison, when you look at PayPal on the eBay platform, it's about 30 percent of the revenue and that's growing at roughly 15 percent. So why shouldn't investors assume here that the real growth engine is actually PayPal?

DONAHOE: Well, PayPal is in fact growing more quickly and growing very successfully. But Trish, if you look at what's happening in the market, commerce and payments are converging, not diverging. The commerce companies are all trying to get into payments and the payments companies are getting into commerce because having a commercial engine allows a payments company to get that flywheel going. And as I mentioned, mobile, the most recent phenomenon, has helped - having a captive market like eBay has helped PayPal get viral traction.

MILLER: Let me say, I've been using the obile platform on eBay for over 10 years. I remember bidding on a bed in Berlin, Germany, in 2002 with my mobile phone and I thought it was so far out that I could do that. Now it's a part of our daily lives. I feel like at this - by the same token digital payments like bitcoin or something similar are clearly going to rule the way we do interrnet commerce in the future. Wouldn't you get such a great head-start on that if you could spin off PayPal, take the valuation for it now before something like bitcion comes along and makes PayPal useless?

DONAHOE: Well there's - nothing is holding PayPal back from pursuing digital payments today as part of eBay. In fact, PayPal is pursuing digital payments and is the leading digital payments alternative in many different environments. So it's not a matter of eBay's holding PayPal back.

MILLER: But for now, right, until everyone starts using bitcion and then there will be no reason to use PayPal.

DONAHOE: Well you can use - you can use digital currencies in the PayPal digital wallet. That's in fact - what PayPal is doing is building a digital wall that can take multiple types of currencies.

REGAN: One of the concerns, John, is that you're not able to attract and retain the best talent right now because people look at the stock price of eBay, and let's face it, in Silicon Valley a big part of your compensation is tied to that stock price, and they say look, this hasn't gone anywhere in two years.

So I want to go some place where there's a lot of growth. So you hear a lot of buzz, for example, about companies like Square. And there's some concern that you can't get the best minds coming out of school right now. What do you say?

DONAHOE: Well Trish, the first thing I'd say is the stock's up 80 percent over the last two years. It was up 80 percent in 2012 and up 4 percent over the last year.

REGAN: Forgive me. Over the last course of one year.

DONAHOE: And it's not been our experience. We're able to attract great people because people want to work on something that has scale, that has impact all over the world. And eBay and PayPal have strong impact on commerce and payments worldwide.

MILLER: Let me ask you about Carl Icahn. He talks to Trish a lot on this program very often, but I've been looking over his history and finding that when Carl Icahn initially makes a suggestion, managers, for example Dick Parsons at Time Warner, typically act in defense of the company and of themselves and don't do what he says. Usually a few years later all of the suggestions that Carl Icahn puts forth have been put into place.

For example, at Time Warner you see now Icahn's strategy. It would have sort of would have been better if they'd done it 10 years ago. So have you thought about working with him rather than ad odds with him?

DONAHOE: Well we're not working at odds with him. The board and I have been looking at these alternatives every year for the last five years. And the criteria we use is what will enable us to compete in the market more successfully? What will enable us to allow PayPal to grow more quickly, PayPal to expand globally, PayPal to ultimately be more successful. And so that's the criteria we use, and to date we believe that is with the company together.

REGAN: John, let me ask you about this. "Bloomberg West," our "Bloomberg West" sat down with David Sacks, he is the former COO of PayPal, and t hey talked to him about this potential spinoff. I'd like your reaction to what he had to say.

(VIDEO PLAYING)

DAVID SACKS, FORMER COO, PAYPAL: All the companies in Silicon Valley I think really understand the benefits of - of focus. And I think there's just a fundamental difference between a company that's trying to solve retail and merchandising, which is eBay - it's really about how do you get people to shop on your site, how do you get them to find the goods they're looking for - and a - and a company that's a payments system.

And so the types of questions PayPal's trying to solve are how do you get people to keep money in the PayPal system? How do you prevent fraud? Things like that. It's actually very - two very different types of products even though they do come together at the moment of purchase. I think that PayPal on its own could be a $100 billion plus financial services powerhouse.

(END VIDEO)

REGAN: He's really making the case here for it to be on its own.

DONAHOE: Well where I agree with him is that PayPal has enormous potential and PayPal can be a huge company. But the way commerce is going is people don't want to pay. They want to shop. And payments is about reducing friction. What PayPal's about is reducing friction. And so being on top of a commerce platform allows PayPal to build products on eBay that they then take off of eBay. That's been the case with web payments. That's the case with mobile payments. That's the case with credit. Bill Me Later we bought.

On our captive eBay marketplace we're driving Bill Me Later penetration, which helps Bill Me - helps Bill Me Later off of eBay. And now as we go into the BRIC and emerging markets, going in together allows PayPal to get more traction more quickly in these BRIC and emerging markets. So we don't see it as an either or.

REGAN: (Inaudible) Apple for example that's looking at getting into the mobile payment business? Square we mentioned. Matt also talked about bitcoin, which he's done a lot of reporting on. How do you compete against all of that?

DONAHOE: Well we're competing by delivering. The fact that we have $180 million of payments volume growing. As you said, the merchant services business growing at 31 percent a year. PayPal growing at 20 percent across - over the year globally across 190 countries. So if you look at PayPal's track record, it's been a strong record. And that's what we're continuing. Initially on the web, we're the number one way to pay on the web. We're number one to pay - number one pay on mobile payments. And over time we believe can take PayPal into the phyiscal world.

MILLER: All right. And eBay, of course let's not forget about the main business, which is where I do probably the majority of my shopping and is I have to say my - one of my websites including everything, everything.

REGAN: I bought some really good art on eBay. I'm not kidding. John Donahoe, thank you so much for being here.

bloomberg.com

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