Credit: Jean-Baptiste Bellet

Why eBay's PayPal deal is three years too late

The news that eBay is to spin off payments arm PayPal, in a deal that could be worth $35bn, is a victory for Carl Icahn - but it should have happened years ago.

by Andrew Saunders
Last Updated: 22 Jan 2015

Online auction giant eBay has announced that it is to split off PayPal, the payments business that it bought in 2001 for $1.5bn (£0.93bn), and that has since become synonymous as the safest and easiest way to pay for all those late-night impulse eBay purchases.

The deal represents a resounding victory for high profile activist investor Carl Icahn who has been pushing for a split for months, although he appeared to have been satisfied with the place on the board he secured for ally David Dorman back in April, and has been suspiciously quiet since then.  

It’s also a crushing defeat for eBay CEO Jon Donohoe, who until the deal was announced had resisted any proposal to demerge the two operations. But with PayPal’s $7.2bn annual revenues growing at 19% annually – twice the rate of eBay’s growth – pressure from less publicly-vocal shareholders has presumably become simply too great.

Donohoe is not expected to remain as CEO of Ebay – he will be replaced by Devin Wenig, currently head of eBay marketplaces, while Amex exec Dan Schulman will take over at PayPal. Donohoe is, however, reported as saying that he will still be on the boards of both businesses, post-spin off.

For its part eBay could make as much as $35bn on the deal. So, all well and good, a victory for shareholder action over a recalcitrant board.

And yet… The market for online payment into which an independent PayPal will re-emerge next year is very different from that which it left back in 2001. In those days PayPal was the only gig in town for retailers and customers alike looking for fast, safe and secure online payment. It was the original, and the best.

Even up until only a couple of years ago, although there was plenty of talk of an imminent mobile payments revolution, there wasn’t much action on the ground. PayPal, unfettered by the needs of its parent and let loose in those circumstances could really have cleaned up.

It is going to find it much harder to do that in 2015, a year in which, thanks to competition from a range of eager new offerings – the likes of Square, Google Wallet and the freshly announced ApplePay to name but three – payment looks set to be a fiercely-contested battleground.

Even so it is hard to claim that PayPal, with its 152 million active users in over 200 countries, has missed the boat. But all those comfortable years spent effectively as eBay’s payment processing unit must have blunted its potential.

Regular users will have noticed a belated effort to broaden PayPal’s user base by eBay – the ‘Pay with PayPal’ icon is popping up in many more places now than it was. But if a similar push had been made rather more than 18 months ago, how much greater might its penetration have been by now?  

It’s hard not to conclude that eBay’s abrupt change of heart over spinning off the business has come at least three years too late for the best interests of PayPal.

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