Some days, it seems like you could just call him Carl Icahn-make-your-company-do-whatever-I-want.
After over a year of pressure from activist investor Carl Icahn, eBay (EBAY) finally caved on Tuesday and announced that it would be spinning off its electronic payment system PayPal. And, immediately afterwards, it would quickly retract its hand before it gets caught up in the massive feeding frenzy touched off by the bucket of chum that PayPal represents for a number of major internet companies out there looking to expand into the digital payments segment.
So, while Carl Icahn winning another public battle with a company he owns part of got a lot of the play in early news coverage, the more interesting story may ultimately be the way that PayPal has gone from an eBay acquisition to being nearly twice as valuable as its once parent company and what that indicates about the future of ecommerce.
How Did We Get Here?
Remember the early days of the internet? When you would still encounter a website that was built on an incredible simple premise and still meant a pretty major paradigm change? YouTube (GOOG) , for instance. The first time I visited the site, it was immediately clear to me that the world as I knew it was different. I mean, just the part of the world where I took in cultural content, but it was pretty clear that things were immediately very different.
My introduction to eBay was much the same. The site made it immediately clear that the very nature of commerce was shifting. It was another early example of how the internet was going to inexorably alter everyone’s way of life. You could connect with people and buy things online, doing something directly and simply that previously involved several steps and typically included a few middle men.
Well, some 20 years on YouTube remains one of the most crucial pieces of Google’s internet empire while eBay, well, just isn’t a very crucial piece of anything.
In fairness to eBay, the company did, in fact, hit on the future of commerce by blazing a trail through the world of online shopping. Unfortunately for them, while they may have been blazing the trail, a number of companies, most notably Amazon (AMZN) , blew right past them on said trail and then kept on going.
So eBay pretty much missed the very boat that it played a major role in building. You can quibble on why and talk to death the fact that eBay ultimately services a very different customer base than Amazon, but you would be missing the forest for the trees. eBay ultimately failed to extend its early dominance in the realm of online shopping into new areas and was ultimately totally eclipsed and relegated to said niche state. Thems the breaks.
When the Markets Close a Door, They Sometimes Open a Window
However, while eBay arguably fumbled a chance to be Amazon before Amazon could be Amazon (which is hardly a fair criticism even if it’s true), it did ultimately make an extremely wise investment when it purchased PayPal in 2002 for $1.3 billion.
At the time, it was a major acquisition, but one that was probably viewed more as a peripheral company that complemented eBay’s primary business. Hey, it was 2002. Amazon was still a site that was mostly known for selling books. It made sense.
But now? An independent PayPal currently has a purchase price estimated at anywhere from $47 billion to as high as $62 billion. That means that since eBay bought the company, not only has it increased in value by more than 36-fold, it’s also hypothetically making up almost three-quarters of eBay’s $65 billion market cap. Which seems a little mind-boggling.
Let’s face it, there’s something deeply ironic about a company acquiring an online payment system to support its incredibly promising business of selling stuff to people online, only to be dwarfed by that acquisition a decade later because of the explosive growth of the industry of selling stuff to people online. The one bright spot for eBay ultimately became the fact that the tremendous success of their competitors at the expense of their own growth. I’m sure John Donahoe may have trouble seeing the humor in all this, but trust me, it’s there.
Mobile Payment Services Big Business, Getting Bigger Fast
It’s also worth noting that eBay’s doing the right thing. For starters, the reality described above isn’t changing. Amazon is now the internet’s shopping mall and eBay isn’t going to mount a serious challenge to that. This move allows the company to become sleeker and potentially serve its niche better than it did.
And, oh yeah, there is that massive pile of cash being produced for its shareholders. That’s important.
It’s also a pile of cash that, without spinning the company off now, could shrink over time. PayPal stands at a critical juncture as the landscape of online financials continues to change. It’s clearly a massive business, it’s clearly growing at a rapid rate, and it’s clearly a wave of the future. And as long as PayPal’s a part of eBay, its value as a pure play in that space wasn’t necessarily being unlocked.
"It doesn't make sense that a global payment system is a subsidiary of an auction website. It's as if Target (TGT) owned Visa (V) or something," said Elon Musk in Forbes back in March. "[PayPal] will get cut to pieces by Amazon Payments, or by others like Apple (AAPL) and by startups if it continues to be part of eBay."
Which is a really interesting opinion coming from the guy who sold PayPal to eBay in the first place. But it’s also true, PayPal has a chance to grow into a major player in a segment currently being circled by some of the biggest companies out there. Speaking of which, a massive buyout of PayPal is also probably going to happen. In fact, that’s probably what’s motivating the move in the first place.
Integrated Online Payment System is Worth a Lot
That Forbes story from March (which you should really read as pretty much everything happening now is laid out by Icahn and Musk only half a year ahead of time) seems to indicate that much of the potential PayPal has was sapped by poor management at eBay. Icahn, for instance, really seemed to view PayPal as rising with high tide and saw it as actually wildly undershooting its enormous potential.
Which is precisely why it appears to be such an attractive buyout target. Firstly, management from a proven leadership team, like Google or the freshly-public Alibaba (BABA) , could allow PayPal to become more user friendly and seize an even-larger piece of that digital payment pie. It’s already a leader in the field just by virtue of being there, imagine if it actually started working smart.
It’s also important to think of how it could fit into a larger online empire. As a piece of Google’s ever-expanding puzzle, PayPal suddenly presents an intriguing range of possibilities. Companies like Google and Apple are trying to create ecosystems that users are tied into. Google, for instance, is already where a great many people are going for email, their calendar, online documents, online chatting, video content, and answers to all of life’s questions. For as much criticism as its failed foray into social media got, it was really an inevitable move for them. Google wants integrate all of your online experiences under their one umbrella, using their smartphones.
So just imagine the inclusion of an online wallet into that equation? It’s a hypothetically seamless transition for the consumer that would be convenient and only drag us deeper and deeper into Google’s web, making their brand an even more ubiquitous part of our everyday lives. Soon, you’re checking your Google email on your Google smartphone to find out from a spreadsheet stored on Google docs that you owe a friend $20, so you use Google’s chat function to tell that person that you’re sending them the payment via your Google Wallet. That last sentence may have caused certain Google executives to pass out from sheer euphoria.
That’s why Apple’s diving in with Apple Pay. That’s why Amazon is trying to develop video content and a smart phone to go with its robust online shopping capacity. That’s why Google already tried and failed to create a Google Wallet. And, most importantly, that’s why Piper Jaffray analysts think Google or another suitor would be willing to shell out $50 to $62 billion for an independent PayPal.
That may seem like a massive sum, but if it’s the price to pay for that puzzle piece that results in your merging all your online digital payments and your bank information into that company’s sphere of influence, it’s well worth it.
Just ask Icahn, who jumpstarted this whole mess. “Another giant in the space would pay a huge premium for PayPal,” he said in the Forbes piece.
Where Will PayPal Land?
So, at the end of the day, Carl Icahn was right. He might have been a jerk about it, but he knew his business. This is the best thing for PayPal, it’s the best thing for eBay, it may be the best thing for consumers, and it’s most definitely the best thing for eBay shareholders, who stand to cash in in a big way on that hypothetical $50 billion payday coming down the road. It’s never easy to admit defeat, but sometimes capitulation is really a good thing.
So where will PayPal end up? Obviously the suitor that has most buzz is Google, which is also where it seems to make the most sense. But Alibaba could also be willing to go big if it means getting a new toehold in American markets.
Aside from that, there could be plenty of companies without as obvious a tie-in that could be interested. PayPal, even as a standalone, is currently sitting in an enviable position at the forefront of a rapidly expanding industry. Which, hell, could even mean it stays out on its own.
Either way, easy as it may be to think of this as another win for Icahn because, well, it is; the bigger story is probably the race for the digital wallet. The course of 2015 may ultimately be defining in terms of which tech giant can present the product that defines what appears to be an inevitable migration to online payment systems. And what happens with PayPal after January could be the most important chapter in that story.
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