In 2015, PayPal will be spinning off from eBay, the popular payment processing service that currently generates half of eBay’s revenue. Whether this is a good decision remains to be seen, but many investors are nervous about eBay’s prospects as a result of this move.
Paypal and eBay’s History
PayPal is a third-party payment processor service that was founded in 1998. It allows users to pay for goods and services online without sharing their bank account or credit card details with vendors. This service was originally conceived as a borderless currency service that would remove governmental control over money and facilitate domestic and international transactions. However, the company initially attracted more than its share of criminals who wanted to use it for money laundering or outright fraud.
Despite these problems, PayPal quickly grew to be one of the top payment services. By 2000, it was the default payment option on many websites, and in February 2002 PayPal’s IPO initially sold stock at $15.41 per share before rising to $20 per share by the end of the day. By October of that year, PayPal beat eBay’s own internal billing system’s usage numbers, as many eBay users preferred using PayPal for transactions. This motivated eBay to purchase PayPal for $1.2 billion. Their acquisition of PayPal allowed both companies to grow significantly, and by 2014 — when eBay decided to split the two companies — PayPal sales accounted for half of eBay’s revenue.
What Does the Spinoff Entail?
The spinoff turns eBay and PayPal into separate publicly traded entities owned by the same people. PayPal will continue to maintain links to eBay for the time being, but the two companies are no longer tied together. Thus, each can pursue separate areas of growth, which was not possible before the spinoff.
Why Is eBay Pursuing This Spinoff?
According to the New York Times, eBay decided to spin off PayPal because it seemed to be in both companies’ best interests. There were several specific considerations:
- PayPal’s growth was inhibited by its ties to eBay. Other large companies such as Amazon were reluctant to use PayPal because eBay was a competing company.
- Although PayPal sales were a large part of eBay’s revenue, eBay payments were no longer a large part of PayPal’s revenue. Sales on eBay currently account for less than one-third of PayPal’s transactions. However, PayPal was not as free to pursue other lines of revenue while tied to eBay.
- Bitcoin and other new currency options may eventually become as popular as PayPal or even outright replace it, and eBay would be less free to acquire these services if still tied to PayPal.
- PayPal’s CEO stepped down in June 2014, and the board of directors believes that PayPal will be more likely to attract the CEO candidates it needs if PayPal is not tied to eBay.
How Will the Spinoff Affect Investors?
The spinoff has created a rift within eBay itself, which in the short term may make investors anxious. However, in the long term, this spinoff is good news for investors.
- Current shareholders will have their shares split between both companies, which means they can invest in two strong companies without adverse tax consequences.
- eBay may become more attractive to other large companies looking for new acquisitions. An eBay/other-company merger could significantly raise eBay’s value.
- Both eBay and PayPal are great investments with lots of growth potential — probably more so than they were when they were merged.
Thus, shareholders should hold on to their eBay and PayPal stock. New investors should watch both of these companies carefully as they move forward on their separate paths. Right now they’re both strong investments, but one may outpace the other in the future.