As a sign of the increasingly competitive and quixotic landscape of the payments industry, online auction site eBay Inc. said Sept. 30, 2014, it will spin off its payments subsidiary PayPal Inc. in the second half of 2015. eBay's decision to unbridle PayPal from its parent company comes as payments becomes ever more crowded, with Apple Inc.'s foray into mobile payments with Apple Pay and the recent record breaking initial public offering (IPO) of China e-commerce giant Alibaba Group Holding Ltd.
eBay said spinning off PayPal into its own publicly traded company, and thereby creating two standalone public companies, allows the two entities to best take advantage of their respective growth opportunities and keep their shareholders happy. The board of directors of the auction site also recognized that keeping the business segments together would hinder their prospects for growth, which would translate into lower returns for its shareholders.
"For more than a decade eBay and PayPal have mutually benefited from being part of one company, creating substantial shareholder value," said John Donahoe, President and Chief Executive Officer of eBay. "However, a thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively. The industry landscape is changing, and each business faces different competitive opportunities and challenges."
The "new" eBay and PayPal businesses will have new leaders at the helm. Devin Wenig, President of eBay Marketplaces, will become CEO of the new eBay. Meanwhile, Dan Schulman, formerly Group President of Enterprise Growth at the American Express Co., was appointed President of PayPal and will assume the role of PayPal CEO following the formal separation next year. Additionally, Donahoe and eBay Chief Financial Officer Bob Swan will step down from their positions but remain on eBay's board.
The reformation of the operating relationship between eBay and PayPal will be accomplished by "arm's length operating agreements between the two entities" that can "formalize the existing relationships between the two companies and capture ongoing synergies," eBay said.
eBay reported that a recent review of its operations by its board concluded that separating PayPal from its parent was the best way forward on many fronts. From competitive, innovative and shareholder value standpoints, the board found that in each case the move made sense. "[S]eparation will create sharper strategic focus and better position each business to capitalize on those growth opportunities as independent companies," eBay said. "The pace of industry change and innovation in commerce and payments requires maximum flexibility to stay competitive and drive global leadership."
Even though eBay and PayPal have fed off each other to make themselves global leaders in their respective fields, eBay admitted that keeping PayPal within the fold would drag down both enterprises. "The benefits of the existing relationships between eBay and PayPal will naturally decline over time…," the company noted.
From a shareholder perspective, the uncoupling of the auction site from its payments engine will result in greater overall benefit to investors. "[B]eyond 2015, eBay and PayPal will each benefit more and create greater value from the strategic focus, speed, flexibility and agility that come with being independent publicly traded companies," eBay said.
Analysis of the proposed split suggests that PayPal will benefit more from the separation than eBay, and apparently for good reason. PayPal, which emphasizes the security of its digital wallet, is considered the most popular third-party payments facilitator in the United States, with over 152 million active registered accounts and revenue of approximately $7.2 billion over the last 12 months, up 19 percent from the previous 12-month timeframe.
Making PayPal a standalone entity may in fact increase PayPal's growth. "When they are no longer under the eBay umbrella, PayPal will have the flexibility to do things that will attract more customers rather than being restricted to eBay's customer base," said Oren Levy, CEO at smart payment engine Zooz. "They'll be able to do things like expand operations into other regions, accept Bitcoin and other global payment options, and basically show innovation without being confined to the roadmap of eBay."
eBay rattled off additional statistics that showcase PayPal's global muscle; it facilitates one in every six dollars spent online today, is available in 26 currencies and in 203 markets worldwide, and has partnerships with 15,000 financial institutions. "Representative of its global reach, PayPal is the No. 1 payments processor for business to consumer exports for Chinese merchants," eBay added.
That last remark takes on special relevance since Alibaba's recent IPO, which raised over $20 billion on Sept. 19, 2014. Alibaba's own payment engine Alipay is much bigger than PayPal in the number and volume of transactions it processes.
"I’m sure that they’ve been watching Alibaba and Alipay, and are aware that they have their sights on working in Europe and the U.S.," Levy said. "For example, they just signed a deal with Airbnb allowing Airbnb customers to pay using Alipay. So if you look at all the money Alibaba raised and think about how it might trickle down to Alipay, you can see why eBay might decide to spin off PayPal."
Apple's entrance into payments is also on PayPal's radar. "It’s a little bit of a land grab," Levy said. "Everyone’s trying to position themselves as leaders, but there isn’t going to be one triumphant winner in this domain."
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