Analysts are calling for eBay Inc (NASDAQ:EBAY) to enhance shareholder value by spinning off its PayPal division as a separate company. ebay’s stock performance compared to Amazon Inc (NASDAQ:AMZN) has been a major concern for investors, and they want action. Since 2008, eBay’s stock has appreciated a mere 1.4 percent against Amazon’s 162 percent.
PayPal growth has far outpaced parent eBay. Revenues at PayPal have risen 75 percent in the past 12 months compared to less than 10 percent at the main auction business. In fact, PayPal now constitutes 40 percent of eBay’s overall revenues.
Wall Street analyst Justin Patterson noted in a Bloomberg interview: “It’s not getting as much credit. There is an inherent conglomerate discount that investors put on it, that is not necessarily in sell-side analysts’ price targets. Spinning out PayPal is one way to get that valuation more quickly.” The shareholders could own two businesses with a total value of as much as $40 a share: a clear case of the “sum of the parts” being greater than the whole.
Another advantage that could accrue to investors: eBay could access financing to grow the prospects of its mainline merchanting business without affecting PayPal’s profitability. That allows management to unlock more value and keep PayPal from being penalized by eBay’s activities.
However, a counter-argument to the spin-off option is making the rounds. According to Colin Gillis, an analyst at BGC Partners LP, keeping EBay and PayPal as a combined business makes better sense as more consumers use mobile devices to shop and pay for goods and services. “You don’t want to have different accounts, different processes — you want to link these things together as much as possible,” Gillis said. “It also gives you that end-to-end data on the entire transaction. If you’re a merchant you have to take PayPal.”
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