What does a split mean for PayPal

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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.

22 Responses

  1. 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. 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.

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

    Unfortunately there is no viable alternative to ebay.

  4. 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…

  5. 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! 🙁

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