EBay Inc. (EBAY) said activist investor Carl Icahn has proposed splitting off its PayPal online payments unit and is nominating two of his employees to join the board, sending shares of the largest online marketplace surging.
Icahn earlier this month purchased EBay stock and has built up a 0.82 percent stake, the company said in a statement yesterday. In an interview on Bloomberg TV, Icahn said EBay “hasn’t done as well as it should have” and called a separation of PayPal — which is one of EBay’s faster-growing businesses — from the company a “no-brainer” that would improve value.
EBay Chief Executive Officer John Donahoe said the company should stay together, citing how a unified entity helps fund PayPal’s expansion into areas such as mobile. The payments unit boosted sales 19 percent last quarter, outpacing 12 percent sales growth at EBay’s marketplace unit, which faces stiff competition from Amazon.com Inc. (AMZN)
“When you separate two highly intertwined and highly performing businesses, it creates significant distraction and disynergies,” Donahoe said on a conference call yesterday.
Icahn’s investment follows a string of actions by activists taking on Silicon Valley technology firms, especially as some of the companies’ rapid growth rates slow. Icahn has invested in Apple Inc. (AAPL) and yesterday tweeted that he had beefed up his stake in the iPhone maker. Microsoft Corp., Hewlett-Packard Co., Juniper Networks Inc. and Riverbed Technology Inc. have also faced activist pressure.
EBay shares gained as much as 7 percent in German trading and advanced 4 percent to the equivalent of $56.58 at 10:45 a.m. Frankfurt time. The shares jumped as much as 12 percent in extended U.S. trading yesterday after the company disclosed Icahn’s stake, and had closed at $54.41 in New York. EBay rose 7.6 percent last year, lagging behind the 30 percent gain of the Standard & Poor’s 500 Index.
Colin Gillis, an analyst at BGC Partners in New York, said e-commerce purchases and payments are inherently tied together.
“You don’t know what PayPal can do as a stand-alone business until you spin it out,” he said. “But I do believe that commerce and payments are intrinsically linked together. Buy something? You pay for something.”
Icahn’s criticism of EBay’s performance coincides with the company reporting fourth-quarter sales that fell short of analysts’ estimates. The San Jose, California-based company said yesterday that revenue for the crucial holiday-shopping quarter were $4.53 billion. That missed the $4.55 billion average analysts’ estimate compiled by Bloomberg. Profit before certain items was 81 cents a share, compared with projections of 80 cents.
EBay also said that first-quarter sales will be $4.15 billion to $4.25 billion. Analysts were projecting revenue on average of $4.3 billion, according to data compiled by Bloomberg. The company forecast sales of $18 billion to $18.5 billion for 2014, compared with estimates of $18.5 billion. For 2015, the company lowered forecasts to $20.5 billion to $21.5 billion from $21.5 billion to $23.5 billion.
Donahoe has sought to boost EBay since he took over the company in 2008. He has streamlined its marketplace and acquired startups to beef up PayPal, even as Amazon and others are competing hard in the e-commerce area. In December, same-store sales at Amazon surged 28 percent while EBay’s rose 11 percent, according to ChannelAdvisor Inc., which provides services to sellers on both of those sites.
Net income during the fourth quarter rose 13 percent to $850 million from $751 million a year earlier. Revenue rose from $3.99 billion a year earlier.
The sales gains were spurred by faster growth at PayPal, where revenue jumped to $1.84 billion. Revenue in EBay’s marketplaces business, which includes auctions and fixed-price sales, rose to $2.3 billion.
Bill Smead, chief investment officer at Smead Capital Management in Seattle, said Donahoe has been performing strongly.
“We don’t like the idea” of a PayPal spinoff, said Smead, whose firm has about $800 million under management, including EBay shares. “John Donahoe is basically doing all the things you’d want done to run a great business.”
Donahoe said in an interview yesterday that he spoke by phone last week with Icahn after receiving a letter from the activist laying out his intentions. Donahoe said the conversation was “very pleasant” and “straightforward.” He said he explained to Icahn that the company would be better with PayPal inside of EBay.
“We agree around the importance of long-term shareholder value creation,” Donahoe said. “We just disagree about how we can best accomplish that.”
PayPal, which is run by unit president David Marcus, has been a growth engine since EBay acquired the business in 2002 for $1.5 billion. The payments unit now accounts for 40 percent of EBay’s revenue. It has 143 million users worldwide.
The division has diversified its service into retail stores and EBay is investing more in the business. Last month, the online retailer completed the $800 million purchase of Braintree, a mobile-payments company that helps startups like room-rental service Airbnb Inc. and cab-calling application Uber Technologies Inc.
“Mobile is going to be at the center of your money and all the transactions you make,” Marcus said in a Dec. 10 interview with Bloomberg TV. “We’re doubling down on our investments in mobile.”
PayPal faces competition from startups including Square Inc. Square has said it’s processing tens of billions of dollars in payments on an annualized basis. By contrast, PayPal generated $180 billion in net total payment value in 2013.
EBay’s 11-member board includes company co-founder Pierre Omidyar, venture capitalist Marc Andreessen, and Ford Motor Co. Chairman Bill Ford. The directors approved an additional $5 billion stock buyback program, bringing the total repurchase authorization to $5.6 billion, the company said yesterday.