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What does a split mean for PayPal

By Chris Dawson September 30, 2014 - 2:01 pm

eBay PayPal spliteBay and PayPal’s future relationship

The first question to ask is what does the split mean for the eBay/PayPal relationship? Well eBay represents about 30% of PayPal’s business and 50% of it’s profits. eBay have already confirmed that they’ll put will put in place long term, arm’s length operating. It’s not expected that there will be any changes to PayPal being a compulsory payment method on eBay.

Often times there will be a cost to a company for putting a payments button on a website and effectively advertising their services. It will be interesting to look at the investor reports in a year’s time and see if PayPal are compensating eBay for providing a large proportion of their revenues.

Long term it does give eBay the ability to consider more payment methods should they become relevant (or willing to pay enough for the privilege. It’s not entirely beyond imagination that one day a payment method such as Apple Pay becomes available on eBay.

Attractiveness of PayPal

It’s been said a number of times over the years that many companies shy away from putting PayPal on their websites as a payment method because of the eBay connection. Moving forward it’ll be down to PayPal to put some distance between the two companies and make PayPal even more attractive for companies. Whilst it would be a surprise, again it’s not out of the bounds of possibility that other marketplaces such as Amazon may one day consider enabling PayPal on their site.

Who gets the debt?

In the split it’s expected that eBay will keep all of the current eBay Inc debt, about $7billion odd. Whilst PayPal’s Transaction Payment Volume at $203B is about 2.5x the size of eBay’s $85B gross merchandise volume, eBay’s revenue of $9.9B is larger than PayPal’s $7.2B. PayPal however is growing at 19% per year compared to eBay’s 10% growth.

In today’s webcast John Donahoe and Bob Swan explain that eBay is a highly profitable business and will have no trouble servicing the debt, in fact one of the benefits of the split will be that the profits stay within eBay and don’t have to be funnelled into growing PayPal.

In the past eBay’s growth has often come from acquisition, in fact PayPal itself was an early acquisition, but more recently companies such as Zong and Braintree have been funded from eBay’s coffers to grow payments. In the future PayPal will be in a position to issue their own stock to fund growth and with zero debt to start with will be in a good position to stand on their own. eBay can then sink their massive profits into eBay growth, not into funding payments growth.

The webcast emphasised that both companies will be capitalized with strong balance sheets with expected investment grade rating. Despite the debt, there’s plenty of cash floating about in eBay Inc’s coffers which will be split between the companies so both end up as attractive investment opportunities.

Could PayPal be a takeover target?

One possible side effect of floating PayPal off as a separate company is of course that in the future they’ll be potentially vulnerable to take over attempts. There are a ton of companies out there trying to get into the payments market and if PayPal had already been a standalone company would Google, Apple or even Amazon have tried to acquire it in the past? We’ll never know what might have happened in the past, but in the future it’s quite possible that PayPal could be swallowed up by a third party.

  • oldhand
    2 years ago

    Could PayPal be a takeover target?

    What banking type institution is not? Takeovers are a great way to funnel money from consumers to the bankers, armies of workers pushing paper around making no benefits for consumers but increasing renumeration for management and directors. Building Societies, Insurers etc are all bankers, takeovers, mergers, divestments are every few years for most.

    Yet ‘takeovers and mergers produce negative returns’ (Google that phrase), customers and shareholders lose, the winners are the bankers.

  • 2 years ago

    PayPal would also be very attractive to device manufacturer such as Samsung.

  • Tim
    2 years ago

    This is a very interesting article. I personally love PayPal and try and always pay by PayPal when given the opportunity because its so much easier than posting card details and I feel it offers me a lot of more security. I would personally love to see a PayPal option available on more sites, even on Amazon would be interesting.

    It would also be great if eBay are able to take on more payment options. I’ve often found that a lot of people don’t have PayPal and outright refuse to get one to pay. If they had the ability to take Credit/Debit card payments and pass that onto the merchants I think it would bring a lot more sales.

    I agree with Chris, PayPal is a very attractive takeover target. Google checkout never really took off so its possible that Google might look at PayPal in the future.

    • 2 years ago

      As far as I am aware we can pay with Credit or Debit Card for all eBay Sales. I think eBay should let customers be aware of this in a better way.

    • Roger C
      2 years ago

      The only “compulsory” bit is that you have to accept and use PayPal if your Buyer wishes but, as you say, eBay cannot force you to use just PayPal, the only organisation/s they successfully banned were of the Western Union type though did anybody report suffering the “security issues” they said? Don’t think so, rather feel that move was to protect PayPal.

      It would “feel” more comfortable to use eBay if the choice of payment was more universal . . . and how many of us have had contacts that are reluctant to use eBay because they didn’t like the way PayPal wanted immediate union with their bank accounts?

    • Tim
      2 years ago

      I thought the only way to pay by Credit/Debit card would be to contact the seller directly for them to take payment. There’s nothing on their own site that can take the payment. I’m not really sure how you would be able to make a card payment online through eBay without paying via paypal guest. If you could offer some advice on this it would be greatly appreciated.

      Thanks

  • john
    2 years ago

    Paypal is replicable. There are other payment methods/merchents out there just as good as paypal.

    Unfortunately there is no viable alternative to ebay.

  • roger browne
    2 years ago

    The King (EBay) is dead but hit’s spoilt nephew (Paypal) is ready to pick up the reins. What has happened? EBay was established as a marketplace where all buyers and sellers could meet (cheaply) without pre-condition. Now it is just a marketplace for large Corporate entities who are readily informed and involved in Ebay’s ‘search algorithms’ so that, effectively the selling market has been restored to the few. EBay has fallen on it’s own sword. Paypal? A secure payment system -only in that it preserves customer data separate from the urchase info. So simple. It charges too much for this privilege and will soon find others biting at it’s heels. The reason – Corporate and Shareholder greed constantly seeking bigger and bigger profits, There is a time for everything and these fools always eventually strangle the ‘golden goose’ that they once held so dear…

    • Roger C
      2 years ago

      There is always the possibility that eBay may have to change some of it’s draconian attitudes . . . and that is a good thing.

      But surely it has got to be good news for the likes of Ebid and others . . . and who knows? How about in the future PayPal acquire Ebid?

    • roger browne
      2 years ago

      Yes Roger, I agree.But it has been very hard for anyone to compete with EBay in terms of establishing an alternative sellers market as it is a ‘numbers’ game. Catch 22 – you need lots of regular ‘viewers’ to make sales and if a selling site is trying to build up it’s number of viewers sellers quickly drop out due to lack of viewers. Answers please?

    • JD
      2 years ago

      I think that eBay marketplace itself both could and should be split.

      I favour ‘eBay Mall’ (new items and deals),
      ‘eBay Boutique’ (small sellers of mostly one offs) and ‘eBay Collector’ (collectables etc.).

      The way that the different items are sold are not ‘better together’.

    • roger browne
      2 years ago

      That is a very succinct analysis that should be progressed…

    • Roger C
      2 years ago

      So agree with your “Catch 22” analysis and there is no way – within my lifetime I think – that Ebid will catch eBay . . . but . . . as the idea’s from JD (below) show we don’t know if eBay will diversify? They played with this before but dropped the concept, could they do it again in order to spread themselves as far as possible . . .

      . . . and, if this whole thing goes massively wrong then it won’t be a case of Ebid catching eBay but of eBay’s share of the auction market declining?

      They’ll have a five year plan I’m sure . . . but they won’t be telling us in advance!

    • roger browne
      2 years ago

      Hi Roger. I’m sure that ‘maximised return to shareholders’ will be top of that 5 year plan. When this happens any ‘shareholder company’ becomes just another machine run by accountants who lack creativity or imagination and are always 2 steps behind the real, dynamic market…

  • MrBill
    2 years ago

    This split is just another way to shaft shareholders.

    • Paul
      2 years ago

      That comment makes absolutely no sense.

    • MrBill
      2 years ago

      Then you have obviously never been a shareholder of a company which has split off its most profitable asset.

    • Paul
      2 years ago

      No, you are right I haven’t. However you must consider that Carl Icahn, one of eBay Inc’s largest shareholders has been pushing hard for exactly this split. The whole idea is to unlock shareholder value! If you own 100 eBay Inc shares the day before the split, the day after the split you will hold 100 eBay shares and (based on some formula) practically 100 PayPal shares also. Why would a company shaft their shareholders? They exist to profit their shareholders.

  • Bruce H
    2 years ago

    In my humble opinion, what this split means is that eBay will be almost certainly be bought up by Alibaba, who already have their own established payments business Alipay – they don’t need Paypal.

    When this happens, it’s just a small step before their B2B customers will become B2C customers and every eBay seller outside of China is priced out of the market for Chinese manufactured goods.

    Be afraid! :-(

    • Roger C
      2 years ago

      Possible truth there as we all moan about cheap Chinese goods on eBay but totally forget what the Indian’s and Chinese are setting up to take on “world wide auctions”?

    • Bruce H
      2 years ago

      Just imagine if Alibaba set up warehouses in all of eBay’s local marketplaces and expanded their AliExpress fulfilment operation to cater for consumer sales! – Not hard to see this happening and because deliveries will be local and quick, buyers will not be put off like they are now. This would be a real game-changer!

    • Bruce H
      2 years ago

      Interesting related article just posted here: http://www.ecommercebytes.com/cab/abn/y14/m09/i30/s06

      “To be perfectly clear, this move is not designed to position either business for sale,” Donahoe said.

      …Yeah, right!

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