5 reasons PayPal could thrive
To some, eBay's (EBAY) announcement that it plans to spin off PayPal sometime in 2015 may seem sudden. After all, the company has spent a good part of 2014 fighting activist investor Carl Icahn and his call to break apart the two units.
But the decision to accede to Icahn's wishes actually comes at an opportune time. That's because the payment services company will be splitting from its parent company as a payment revolution changes the way consumers shop.
Rivals are developing new payment methods aimed at muscling in on the payment system industry. Take a look at Apple (AAPL), which will introduce its Apple Pay system next month. With a swipe on their iPhones, consumers will be able to make purchases without taking out their wallets. By stepping out from eBay's umbrella, PayPal may be compete more effectively, not only from a technology standpoint but by removing an inherent conflict.
"The big issue here is channel conflict, in that eBay is one of the preeminent retail brands, and PayPal is closely associated with eBay," James Angel, a professor at Georgetown University's McDonough School of Business, tells CBS MoneyWatch. "By separating them, you make it more likely that other online retailers will look at PayPal."
Investors cheered the decision, with eBay shares rising more than 7 percent on Tuesday.
For his part, billionaire investor Icahn noted that he was "happy" about the decision. The company's managers "have acted responsibly concerning the separation -- perhaps a little later than they should have, but earlier than we expected," he said in a statement.
Below are five ways PayPal, and its future investors, stand to benefit from the separation.
Removing channel conflict. As Angel notes, one issue that may have acted as a roadblock to PayPal's growth was that its corporate parent is a rival to many other large online retailers. By becoming a stand-alone business, PayPal stands to woo some new, larger customers. Even with the inherent conflict of eBay as its parent, PayPal was demonstrating strong revenue growth, with second-quarter sales rising 20 percent.
Allowing technological innovation. Splitting off from eBay means PayPal will be able to focus on new technology and innovations in the payment services arena. This comes not a moment too soon, given the emergence of Apple Pay, as well as other new digital payment services. In a statement on Tuesday, eBay CEO John Donahoe said the separation will allow both companies to have "added flexibility" and "sharper strategic focus."
Valuing each company on its own merits. By splitting apart, investors will be better able to assess each business on its own merits, which could help unlock shareholder value. Piper Jaffray analyst Gene Munster told The Wall Street Journal that the combined value of both businesses is $62 per share, or about 18 percent higher than its closing price on Monday. Georgetown's Angel notes, "If investors are looking at eBay as an e-tail company and ignoring the payment side, they may not be recognizing the value there. The market has been fairly generous to payment companies" such as Visa, whose stock has increased 10.4 percent this year.
Mergers and acquisitions. Paypal will be able to participate in a payment services industry that may be poised for consolidation, Icahn wrote in his statement on Tuesday. PayPal could either make acquisitions, or take part in "a merger between PayPal and another strong player in the industry," he noted. Either way, splitting from eBay allows PayPal to be a player as its market consolidates.
Focused management. While perhaps not as easy for shareholders to quantify, the split could also benefit PayPal by giving it more management attention. "PayPal as an add-on to eBay was, 'How do we make things work?', rather than, 'This is how we help our customers pay,'" notes Georgetown's Angel. "They might not be getting all the top-level managerial focus that they need." When PayPal splits off, it will be run by American Express executive Dan Schulman, who will take over as CEO.