In an About Face, eBay Announces It Will Spin off PayPal Next Year

Somewhere, Carl Icahn is smiling.

Ebay Inc.’s top management announced early Tuesday that the online auction pioneer is beginning preparations to spin off its PayPal Inc. unit some time in the second half of next year in a transaction that will result in eBay and PayPal operating as two independent, publicly held companies.

At the same time, eBay has recruited one of American Express Co.’s senior executives, Dan Schulman, to take over PayPal. Schulman, who starts immediately as PayPal president and will become chief executive when the spinoff happens, had been instrumental as president of enterprise growth in building AmEx’s Serve digital-payments platform. Ebay chief executive John Donahoe has been filling in as PayPal president since the abrupt departure in June of David Marcus, who took a position at Facebook Inc.

Investors like what they heard Tuesday morning. Ebay’s stock was up 8%, to almost $57 per share, five hours after the spinoff announcement.

Ebay’s decision to separate from PayPal also seems to vindicate Icahn, the well-known corporate raider of the 1980s who waged a very public, but in the end losing, proxy fight early this year to get the online auctioneer to spin off its payments unit. “I believe Carl Icahn was right to begin with and was proven right” by Tuesday’s announcement, says Gil Luria, managing director at Wedbush Securities, Los Angeles.

Indeed, the decision to separate the two companies may well have been driven more by investor concerns about eBay’s valuation than by any potential operational advantages. For the past year, eBay’s shares have traded in a fairly narrow range between $48 and $60. “This was really about the share price. Ebay’s stock has languished for a while,” says Luria. “They wanted to do right by the shareholders.”

As an independent company, PayPal is not likely to be substantially stronger than it is now, Luria argues. “I don’t feel like eBay has constrained PayPal in any way,” he says. A pioneer in processing for e-commerce merchants, PayPal has in recent years made major investments in mobile payments and in serving brick-and-mortar retailers with both point-of-sale and Bluetooth-based beacon technology.

Still, some observers argue the spinoff will better position PayPal in high-potential markets like mobile payments. In the burgeoning market for mobile wallets, PayPal has what is probably the most successful entry so far, while major rivals like Google Inc. have stumbled. This is a key market for PayPal. Total U.S. mobile payments in-store will balloon from $3.5 billion this year to $118 billion in 2018, according to researcher eMarketer Inc.

That growth potential is now drawing heavy-duty competition. Earlier this month, Apple Inc. introduced its Apple Pay mobile-payments service as part of it iPhone 6 and Apple Watch introduction. “Breaking off from eBay will provide PayPal with more autonomy to compete in the payments space, particularly with respect to Apple Pay and other emerging mobile wallet providers,” says eMarketer analyst Bryan Yeager, in a statement.

For its part, eBay’s top management argued Tuesday that PayPal will be better off as an independent company. “I’ve never been more bullish about PayPal’s prospects,” said Donahoe in a conference call with analysts to discuss the separation. While Donahoe in January cited “synergies” between the two companies as a major rationale for fighting Icahn’s break-up proposal, on Tuesday he said the companies were less intimately linked.

Ebay now accounts for less than 30% of PayPal’s volume, Donahoe said, predicting that proportion will ultimately drop to less than 15%. “The synergies will decline over time,” he told analysts, and can be served through so-called arm's-length commercial agreements the two companies will set up over the coming months. One of these synergies, for example, is the payments data PayPal can generate for eBay, while eBay’s transaction data feed into PayPal’s risk models.

Donahoe, meanwhile, expressed strong enthusiasm for new PayPal chief Schulman, who before his four-year stint at AmEx had spent nearly 30 years in the telecommunications business, including 18 years at AT&T. “Dan Schulman brings a blend of skills and experience that are a perfect fit to lead PayPal into the future,” Donahoe said during Tuesday’s analyst conference. “I don’t think we would have gotten Dan without this CEO opportunity. He’s the right guy at the right time.” Schulman was unavailable Tuesday for comment.

In the spinoff, PayPal will take with it several assets eBay has acquired over the years and placed under PayPal’s umbrella, including digital-payments processor Braintree and its Venmo unit, acquired last year, and online spot-credit provider Bill Me Later, acquired in 2008. Bill Me Later has been renamed PayPal Credit. EBay has owned PayPal since acquiring what was then a 4-year-old payments startup in 2002 for $1.5 billion.