Activist investor Carl Icahn is making another push at another company within technology. This time he has eBay in his sights, specifically he wants to spinoff the PayPal business into a separate entity. Most recently Mr. Icahn has made noise over at Apple (NASDAQ: AAPL) where he would like to increase and accelerate its buyback program.
PayPal is generating lots of interest and may have surpassed its parent in value. Most investors would pay a higher multiple for the growth potential at PayPal. The buzz is around its success in increasing transactions but especially the growth in its electronic wallet business.
Mr. Icahn is an activist investor that looks for value in companies that is being undervalued by the Street. The investments range in focus from bringing in a new management team or Board members to clean up operations, deploy cash differently or to sell off a business. In the case of the latter, he looks at divesting a business that is either dragging down the companies valuation multiple or not getting the multiple it deserves. The analysis is typically based on a sum-of-parts methodology where the value of each business separately is greater than the combined value. He believes that is the case with PayPal and eBay.
Mr. Icahn owns 2% of the outstanding shares of eBay and has nominated two of his employees to eBay’s Board. These two Board members would then push his agenda for eBay to spinoff PayPal into a separate business. Mr. Icahn has noted that it will not be an easy sell to the Board. But he believes that PayPal can innovate faster in the rapidly growing space of electronic payments processing. Almost all the major mobile carriers, BlackBerry (NASDAQ: BBRY), Apple and Samsung are pursing mobile electronic payments or electronic wallet applications.
PayPal Well Positioned to Benefit from Mobile Payment Shift
The mobile payment market is ripe for significant growth over the next five years. Anyone that makes a daily stop at Starbuck (NASDAQ: SBUX) and sees the frequency that customers use the iPhone or other mobiles to pay see the potential. Customers like the easy of carrying one device and being able to shop and pay as quickly in stores as they do online.
PayPal is pursing adoption by brick and mortar operations and has had some wins at national chains. It allows people to pay through their phones through their PayPal accounts. These PayPal accounts can be linked to their bank accounts or funded by other means.
For companies like PayPal, the market is attractive because they can charges a small fee to process billions of transactions, just like Visa or MasterCard. The key for PayPal at this point is to keep signing up stores, since it has the technology developed and in use while also improving its solution. Since, PayPal’s solution was not developed by a mobile phone manufacture it works across platforms. It remains uncertain if Apple or other companies will follow this. PayPal has an advantage at this point by being one of the early innovators in a potentially huge market.
Estimates for Gartner are that mobile payments will top $720 billion annual by 2017, up from $235 billion in 2013. In total there were around $15 trillion in retail transactions in 2013, so the growth potential is enormous.
All this said, eBay has issued a statement as to why the spinoff does not make sense. It believes eBay accelerates PayPal’s success, eBay data makes PayPal smarter and eBay fund its growth. While it accelerated its success early on, a partnership accomplishes the same thing going forward. How valid the second point on data sharing is uncertain, but the spinoff could also fund development.
In the recent quarterly report, PayPal revenues were up over 19% and had 5.2 million active new users sign-on to its service, giving it a total of 143 million users. Transactions volumes were up by 25% in the quarter.
Others have noted that having eBay own PayPal is similar to having Target own Visa. It opens the door for Amazon, Google, Apple or others to more easily push into the space. While PayPal would not enjoy its current position without eBay, it cannot fulfill its future potential by continuing to live under eBay’s roof.
Conclusion – Buy eBay to get PayPal’s Growth
For investors, eBay traded relatively flat in 2013. Owning the shares of eBay is a good way to play the growth in the electronic wallet market. The eBay business presents little risk for investors and they can benefit from success at PayPal. In addition, shareholders could be rewarded if the businesses do split with shares and PayPal and likely and increase in the value of their holdings that would result, since muchd of the Street agrees with Mr. Icahn’s stance.