Who wins most from the split, eBay or PayPal?

Extreme close-up of explosion of champagne bottle corkRegardless of what the eBay investor releases say, there are always winners and losers in a divorce and eBay and PayPal are no different. In truth both sides win a little and lose a little, so who are the winners and losers in this split?

Who brings more to the table?

eBay’s results have been shored up by PayPal for quite some time. Whilst the marketplace has dragged it’s heels on performance PayPal has always raced ahead to save the day at the end of each quarter. However it’s also true to say that PayPal heavily relies on eBay for customers. Not only customer every time a merchant sells something on eBay, but they’re also the defacto choice for a small business setting up a website and integrating payments for the first time. What’s simpler than having your website payments go into the same PayPal pot as your eBay sales, certainly it’s more attractive and simpler than applying for a merchant banking account.

Who has the biggest opportunities?

eBay could do the unthinkable and add a competing payment method to the marketplace. It’s been a long time since there was a large PayPal competitor, mainly because eBay have mandated that PayPal be offered on all transactions. eBay Inc said today “Becoming independent in 2015 will provide each company with new market and partnership opportunities that would have been more difficult to pursue as a part of the combined entity”. That not only means PayPal can go after business that the eBay connection would make more difficult, it also means that eBay can explore partnerships which in the past might not have been in the best interest of PayPal.

eBay New Logo FeatWhat does it mean for eBay sellers

PayPal wouldn’t work (currently) without eBay, so all PayPal buyer and seller protections will remain in place for the foreseeable future. Whilst protections are different for eBay sales compared to selling on your own website, will still benefit form the place long term, arm’s length operating agreements that are to be put in place. Even as a separate company that ties PayPal firmly to eBay for the foreseeable future ensuring today’s protections remain.

Hand ShakeOperating agreements

Both new companies will want to maximise their historical joint successes. PayPal will still want eBay customers to be defacto PayPal companies and eBay still needs a robust payment platform. eBay and PayPal are so deeply intertwined for marketplace sales that the operating agreements are key to the split, almost like when a couple divorce they have custody arrangements for their children.

Key terms in the agreement will be presence, take rate, Intellectual Property, data sharing, and mechanisms to amend the agreement. Who gets what, who owns what, what will be shared and how to rewrite the rule book when there’s a divergence of interests.

Both companies will also be keen to minimise anything that gets in the way of a mutually beneficial agreement… at least to start with. Where things will get interesting is when future opportunities result in diverging interests and one or other company goes in a new direction.

CashFunding

eBay are keeping all of the debt, PayPal walks away debt free from the divorce. PayPal has benefited massively over the years with growth from eBay’s customers, data from eBay transactions and development from eBay’s platform and acquired companies. That will be replaced with the operating agreements, but one thing that won’t be replaced is a practically bottomless pit of cash to fund future growth.

The low cost funding that PayPal has enjoyed for well over a decade will be replaced with a new capital structure. Whilst eBay keeps the debt, the new PayPal company will in the future have to fund innovation from their own profits or through seeking outside investment as any other company does.

DollarWho’s paying the bill for the split?

Effectively eBay. The investor blurb states that both companies are expected to incur one time charges related to the transaction preceding the separation, but in effect seeing as eBay Inc own the whole lot it’ll come out of eBay’s coffers.

Any apportioning of the costs to eBay or PayPal balance sheets is purely an accounting move as ultimately both companies will knock it off their forecasts and it’s irrelevant to investors right up until the point when the two companies shares are split.

eBay Share Price on announcement of PayPal Spin offI hold eBay shares, what will happen to them?

It’s far too early to say what the effect to shareholders will be, except that you’d expect the total value to rise. Once shares are split and you end up owning eBay and PayPal shares they two together will probably be worth more than your current eBay Inc shares.

The current share price which opened around 7% up yesterday says it all.

John DonahoeJohn Donahoe, Carl Icahn and Dan Shulman

John Donahoe has long said that the synergies between eBay and PayPal made a split unfavourable. Carl Icahn, an eBay share holder has been calling for PayPal to be spun off and today got his wish. Dan Shulman probably wouldn’t have accepted the position as PayPal President and future PayPal CEO if he hadn’t been promised PayPal would be spun off.

The only real loser here is John Donahoe, it would in some ways be untenable for him to stay after the split, having been so adamant it wasn’t the right thing to do, so it’s understandable that overseeing the split will be his swan song.

What a way to go though, after taking over from Meg Whitman almost a decade ago, the eBay history books will remember him as the guy who took over eBay when it was on the way down, transformed the marketplace and turned it around, and then left giving shareholders a bumper pay day.

Ten years is a long time to run any business and it’s probably time for fresh blood, which eBay will have in the shape of Devin Wenig and PayPal with Dan Shulman. eBay Inc as we know it will disappear, John Donahoe will remain on the board of one or both new companies but step back from the day to day management of both companies.

If nothing else John Donahoe will leave eBay at possibly the most exciting time in it’s history. Creating two new companies, adding shareholder value and setting eBay up for it’s third decade is no small achievement. His job is done.