If a former corporate raider takes a strong position in a company, get ready for a shake-up.
In 2013, famous activist shareholder Carl Icahn nominated two of his employees to the eBay (NASDAQ: EBAY) board of directors and submitted a proposal for a spinoff of eBay’s person-to-person payment company PayPal.
In addition to the 30 million shares of eBay Icahn owned, companies he controlled had acquired shares and derivatives that gave him a further 0.82% interest in the company.
By spring of 2014, Icahn agreed to drop the proposal and withdraw his nominees to eBay’s board, and it looked like the company would remain as it had been.
Then, on Tuesday morning, eBay announced that it does intend to go ahead with the spin-off. PayPal will become a stand-alone publicly traded company in 2015.
Let’s not talk about whether or not this spin-off is a good idea for eBay. Instead, let’s concentrate on the value of PayPal and the reasoning behind Icahn’s push to separate it from eBay.
Icahn’s Track Record
Carl Icahn is what is known as an activist investor. He acquires a controlling stake of a company’s shares, obtains seats on that company’s board, and then tries to make major changes in the interest of improving value for shareholders.
His past is pockmarked with hostile takeover attempts, proxy battles, and directorial shuffles, and his early behavior in this arena could be described as that of an old-school corporate raider. Yet his major moves in the last fifteen years — even the uneventful ones — have been smart and tech savvy.
He gets involved with companies that are extremely relevant to the tech-investing crowd.
In addition to eBay, his current holdings include Apple Inc. (NASDAQ: AAPL), CVR Energy (NYSE: CVI), Federal-Mogul Corp. (NASDAQ: FDML), Nuance Communications (NASDAQ: NUAN), Hologic Inc. (NASDAQ: HOLX), and Netflix (NASDAQ: NFLX).
He sees problems in tech companies and tries to enact a change. Often, he has to quit his fights and let companies choose their own fate.
Years ago, for example, he understood the threat of streaming video and attempted to slam together failing businesses Blockbuster and Circuit City so they could compete in a market where they had fallen behind. His moves were abandoned, and the companies went belly up.
In 2013, he attempted to acquire the world’s third-largest PC maker, Dell, out from under founder Michael Dell’s feet rather than letting the company go private. After months of battling, with plenty of harsh words thrown back and forth, Icahn hung up his boxing gloves, and Dell went private.
In this case, however, he didn’t have to fight too hard.
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PayPal Will Be a Buy
EBay has been trading flat since 2013, and the company’s valuation recently fell to 2011 levels.
According to Bloomberg data, it’s been the fifth-worst performing tech stock in the S&P 500 index this year, and its earnings ratio has fallen to less than half of a company like Amazon (NASDAQ: AMZN).
One of the main reasons for this is that eBay is something of a relic of Internet 1.0, and though PayPal is also from that era, it’s moved well into the mobile era and beyond.
For example, at the end of 2013, eBay’s mobile commerce value was $22 billion. PayPal’s, meanwhile, was $27 billion. It gained 5.2 million active registered accounts in the last quarter of the year, bringing it to a total of 143 million users, a 16% increase over the previous year.
In its financial reports from the end of last year, eBay called mobile the “key catalyst” in its growth. PayPal has thusly adopted a “mobile first” strategy.
To do this, it has a few very noteworthy projects under way. With its PayPal Here service, the payments company participates in the highly lucrative mobile credit card-swiping business dominated by Jack Dorsey’s Square.
In mid-2014, PayPal also acquired Braintree, which provides the payment platform for next-gen microcommerce services such as Airbnb, OpenTable, TaskRabbit, and Uber.
With its foot in the door of modern small businesses, PayPal is in the right place at the right time.
EBay CEO John Donahoe sees this opportunity, too. “We have hundreds of millions of people doing literally billions of mobile transactions and a lot of experience there,” he said in a recent USA Today interview.
“Part of our explicit strategy is to be able to be present where the consumer is. Consumers can buy what they want, when they want it, and we want PayPal to be present on all mobile operating systems as we are today and all the merchants.”
Good Investing,
Tim Conneally
For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.
