After a long battle with activist investor, Carl Ichan, eBay management has finally decided to move forward with a deal to divest PayPal. PayPal, the payment processing arm of eBay, was acquired in 2002 for $1.4 billion in stock. It will be separated in a tax-free shareholder spinoff to be completed in the second half of next year.
The decision to split comes after current eBay CEO, John Donahoe, rigorously defended keeping his company together. Following this deal, he will step down and allow new management to take over. The reason behind Mr. Ichan’s desire to see this company separated are two fold: to allow each firm to specialize in its field and to open up opportunities for possible mergers and acquisitions. On the heels of Apple’s announcement of Apple Pay, investors believed that permitting PayPal to act as a separate entity would allow it to focus its efforts on maintaining and growing market share in a more competitive environment. This could be done through strategic acquisitions of smaller payment processers, something much more feasible with a separate company, or by merging with another large company to provide a bulwark against the encroachment of Apple Pay, Google Wallet, and Bitcoin.
I tend to view this as a win-win situation from all sides. Today’s competitive marketplace is starting to make the inefficiency of conglomerate-type entities more apparent. It does not make sense to believe a management team can have the expertise and focus to expand eBay’s sales while pushing PayPal to compete with incoming competition. Allowing these two companies to act separately and in their own best interests will give them the edge needed to continue growing and generating profits for shareholders. The rally of eBay’s stock following this announcement seems to be a signal that divestitures will be a major tool for optimizing companies in the future.
- Rushi Patel