PayPal spinoff allows eBay to focus on core business operations and growth opportunities to bring more value to shareholders amid increased competition

Net revenues of $4.92 billion with 155 million active buyers

PayPal spinoff offers significant share price appreciation upside

Leading market share and possible Enterprise business spinoff/IPO add upside

EBay, Inc. (NASDAQ: EBAY) was founded in 1995 and specializes in online commerce and payment solutions for consumers, merchants and retailers worldwide. The company has three operating segments: eBay.com, PayPal and eBay Enterprise. EBay has over 133 million unique visitors and over 155 million active buyers.

PayPal Spinoff Seen As Positive For Shareholders

Ebay’s PayPal unit is a digital wallet that provides payment and money transfer solutions for the e-commerce industry, within and beyond Ebay. EBay acquired PayPal in 2002 for $1.5 billion, or $21.93 per share at that time. At the end of 2014, PayPal had operations in 203 countries with over 152 million registered users.


On September 30, 2014, eBay’s Board approved a tax-free spinoff of PayPal into an independent publicly traded company as part of a strategic plan to capitalize on fresh opportunities and counter increased competition in the e-commerce payments sector. As a separate company, PayPal will gain the flexibility needed to remain competitive and pursue multiple growth opportunities. PayPal could also open up its offerings to Ebay competitors and expand sales and market share. The spinoff will be completed in the second half of 2015.

PayPal has grown its transaction volume by about 22% over the past two years, with a 26% boost in transaction value to $243.64 billion. 48% of its transactions were international. On this, the company garnered $7.1 billion in transaction revenue in 2014 and an additional $918 million in other revenue, and generated $1.73 billion in free cash flow.

Management advised shareholders on PayPal’s financial results, not to be confused with eBay’s Payment business segment. PayPal transactions increased 49% from 2.66 billion in 2012 to 3.96 billion in 2014. Total net revenue increased 42% from $5.66 billion in 2012 to $8.03 billion in 2014.

On February 11, 2015, eBay announced that it would give PayPal $5 billion in cash to help the company establish itself as a leader in the payment processing industry.


Dan Schulman serves as President of PayPal and has been designated CEO of the independent company once the spinoff is complete. Mr. Schulman has over 30 years of senior leadership experience within the mobile payments and technology industry.

Analysts Believe EBay Shares Could Climb 14% on PayPal Spinoff

As of 2/27/2015, eBay shares were trading at $57.91, giving the company a market capitalization of $70.07 billion. Shares were close to the company’s 52-week high of $59.70 and above its 50-day average of $55.42 and 200-day average of $54.23. Shares are up 2% since the PayPal spinoff announcement on September 30, 2014, and are up 3% year-to-date. Analysts believe shares could rise to $66, which offers shareholders potential upside of 14%.

Shares trade at 17.7x annualized Q4 earnings, well below peer multiples, and offer excellent long-term upside.


EBay does not currently pay dividends and does not expect to start distributions in the near future.

The company is well capitalized with solid cash flow and excellent financial strength.


$3 Bn Stock Repurchase Program Will Prevent Dilution

EBay’s Board approved an additional $2 billion for share buybacks, over the current $1 billion authorization, bringing total repurchase authorization to $3 billion as of January 21, 2015. The company repurchased $1.2 billion in stock in FY2014 and the expanded authorization should boost shareholder value, particularly if shares rise above the average repurchase price.

Management Exploring Strategic Options for eBay Enterprise

EBay management is considering spinning off or possibly an initial public offering for eBay Enterprise. Separation from eBay Marketplace will further allow each company to focus on its primary business. The figure below shows the potential organizational structure of eBay after it separates from PayPal and eBay Enterprise.


Ebay – Most Popular Online Marketplace

EBay.com is an online marketplace where buyers and sellers from across the globe routinely trade a variety of goods, either as direct purchase (the “Buy It Now” option at a seller-specified price with no bidding or bid-related time delays) or through auction with a minimum selling price and a specified open bid timeframe. As a platform, Ebay allows buyers and sellers to rate their experiences with each other and protects buyers with a money back guarantee if items are not received or are not as described. To its credit, Ebay has succeeded in developing a trustworthy sight-unseen transactional marketplace. Its marketplace revenue totaled $8.8 billion in 2014, up 6% from 2013 but it faces growing competition from platforms such as AliBaba.com (BABA) and its AliPay payment processing option.


Expanding Into Bigger Item Categories

In early February 2015, eBay announced a partnership with online live marketplace company, Proxibid, that will combine Proxibid’s live auctions for heavy machinery, farm equipment and automobiles with eBay’s advanced technology and bidding process. With this partnership, eBay will grow its Business and Industrial category while Proxibid gains exposure to all of eBay’s active buyers.

EBay Enterprise Expands Global Partners with 1,015 New Clients

EBay Enterprise gives brands and retailers the ability to create, develop and run online shopping sites. Additionally, the subsidiary offers marketing, engagement, customer support, payment processing and fraud integration solutions to businesses. The company’s Magento e-commerce platform helps companies grow their online businesses and boasts over 240,000 retailer clients worldwide that collectively account for approximately 26% of all e-commerce websites.

For the year ended 2014, EBay Enterprise reported 1,015 newly acquired clients and 1,711 clients that renewed or extended services. The company was also named a “Strong Performer” by Forrester Research (FORR) in three separate reports. EBay Enterprise revenue totaled $1.2 billion for 2014, up 6% from 2013.


New Independent Directors Strengthen Board

After serving six years on eBay’s Board, Marc Andreessen announced his resignation on October 20, 2014. Mr. Andreesen is the cofounder of web browser company Netscape Communications Corporation and software company Opsware. He also sits on the Boards of Facebook (FB) and Hewlett-Packard Co (HPQ).

In January 2015, eBay added Perry Traquina and Frank Yeary as independent directors to its Board. Mr. Traquina is the former CEO of investment management company Wellington Management and helped double the company’s assets under management to $900 billion before retiring at the end of 2014. Mr. Yeary cofounded financial advisory firm CamberView Partners LLC and previously held senior positions with global bank Citigroup Inc (C) and investment bank Salomon Smith Barney.

Additionally, eBay entered into a standstill agreement with its largest shareholder, investor Carl Icahn, over adding Icahn Capital executive Jonathan Christodoro to its Board. Mr. Christodoro brings several years of investment and financial experience to the company’s board. With these additions, eBay has 15 directors, of which 13 are independent.

EBay Leadership Team Growing Company Globally

John Donahoe has been Chief Executive Officer and President of the company since March 2008. Mr. Donahoe is responsible for driving the company’s core businesses and overall strategy to make eBay a global leader in e-commerce and global retail. Under his watch, eBay has diversified itself with over 30 acquisitions such as online ticket retailer StubHub, finance company Bill Me Later and open-source e-commerce company Magento. Mr. Donahoe previously served as President and CEO of global investment consulting firm Bain Capital.

Bob Swan joined the company in March 2006 and serves as Senior VP – Finance and Chief Financial Officer. Mr. Swan handles all financial decisions for the company such as controllership, financial planning, taxes, auditing and investor relations. He previously served as CFO of information technology company Electronic Data Systems (EDS) and aerospace company TRW.

Devin Wenig serves as President of eBay Marketplaces and oversees eBay.com, classifieds and StubHub businesses on a global level. Prior to joining the company, Mr. Wenig spent over 18 years holding various senior positions within media and information firm Thomson-Reuters Corporation (TRI). He currently serves on the board of directors for the March of Dimes, a nonprofit that focuses on the health of mothers and their children.

Fourth Quarter Revenues Up 9% on 21% Increase in Enabled Commerce Volume

For the three months ended December 31, 2014, eBay had net revenues of $4.92 billion (up 9%), gross profit of $3.32 billion (up 8%), income from operations of $1.06 billion (up 4%) and net income of $1.02 billion (up 20%), or $0.82 per share (up 26%).

For the fourth quarter, marketplace revenues were $1.84 billion, payment revenues were $1.99 billion and enterprise revenues were $371 million.


EBay amended its fourth quarter financial results on February 5, 2015, to include a reduction in income taxes of $87 million which increased GAAP net income from $936 million to $1.023 billion.


As of December 31, 2014, eBay had $6.33 billion in cash and cash equivalents, $6.78 billion in long-term debt and $19.91 billion in total stockholders’ equity.

Guidance Shows Slight Decrease in Q1 Revenues But 4% – 7% Overall Increase in FY2015

Management released updated guidance for first quarter and full-year 2015. For the first quarter, the company expects net revenues of $4.35 – $4.45 billion and GAAP earnings of $0.37 – $0.43 per share. For the full-year, the company expects net revenues of $18.6 – $19.1 billion and GAAP earnings of $2.17 – $2.32 per share.


Summary

Ebay shares have handsomely rewarded investors over the years, and the company’s three core businesses continue to expand market share in their respective areas. Moreover, management has responded positively to investor feedback and recently announced a strategic reorganization plan that includes spinning off the company’s highly profitable PayPal business and considering a spinoff or IPO of its Ebay Enterprise segment. Shares are up since the announcement and Wall Street expects significant further upside for shareholders that continue to hold PayPal and Enterprise shares post divestiture. While Ebay faces growing competition, its long-standing reputation as a trusted e-commerce platform, solutions and payment provider put it well ahead of competitors.

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