eBay/PayPal: ties that bind

When eBay bought PayPal in 2002, news of the deal sent eBay's shares down 7 per cent. The $1.5bn price tag seemed exorbitant for a little payments start-up. Today the child has outgrown the parent. Most analysts believe PayPal will be the more valuable company after and PayPal split later this year. PayPal's revenues are growing much faster, and surpassed those of eBay's marketplace segment, where users buy and sell goods online, last year.

A more subtle issue than valuation is how the two companies' relationship will change after the split, and how this will impact the bottom line of each. Four out of five eBay payments are currently made via PayPal. For five years after the split, PayPal must pay eBay $13m for each percentage point increase in this level; eBay must pay PayPal the same amount if the level falls. If the penetration rate falls below 75 per cent, eBay's payments to PayPal rise to $50m per percentage point drop. The payments are not huge, in context: PayPal generated $1.7bn of free cash flow last year, the rest of eBay about $2.6bn. But they are big enough to hurt. For the first five years PayPal will also continue to pay eBay an (undisclosed) referral fee.

This arrangement should help PayPal. But what does eBay gain? Barclays thinks this system could discourage eBay from embracing new payment systems, a big concession when payment innovations are proliferating. After the split, PayPal will have a giant "for sale" sign painted on it. Activist investor Carl Icahn has made sure that PayPal's bylaws will be acquirer-friendly. So in a few years it could well be the new owner of the business will be rival like Amazon or Google which would benefit from the operating agreement.

The decision to split may have unlocked value already; eBay's share price is up 6 per cent since the announcement. But value cannot be maximised if the marketplace side of eBay is hamstrung in the process.

Email the Lex team at [email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation