The American multinational corporation and e-commerce company eBay is splitting off its payments system PayPal into a separate company. PayPal, the online payments giant, is seen as the real crown jewel of the eBay business. And investors have been clamoring for a way to unlock PayPal's full potential and value.
The move marks the end of a partnership when eBay acquired PayPal for $1.5 billion in 2002. The acquisition deal was initially pitched as a way for eBay to boost PayPal transactions by driving auction participants toward the online payment service. But eBay itself apparently couldn't realize any significant merger benefits beyond pushing traffic.
The news first came on September 2014 when eBay announced a strategic review of the company determined that both eBay and PayPal would be better off with a sharper focus.
In the announcement, eBay said that a recent strategic review of the company determined that both eBay and PayPal would be better off with a sharper focus. By making PayPal a separate publicly traded company, both companies can benefit by creating their own shareholder value.
"eBay and PayPal are two great businesses with leading global positions in commerce and payments," said eBay's President and CEO John Donahoe. "For more than a decade eBay and PayPal have mutually benefited from being part of one company, creating substantial shareholder value."
From the companies strategic review, what kept eBay and PayPal together beyond 2015 is clearly disadvantageous. The industry's landscape is changing, and each business faces different competitive opportunities and challenges.
"eBay and PayPal will be sharper and stronger, and more focused and competitive as leading, standalone companies in their respective markets," continued Donahoe. "As independent companies, eBay and PayPal will enjoy added flexibility to pursue new market and partnership opportunities. And we are confident following a thorough assessment of the relationships between eBay and PayPal that operating agreements can maintain synergies going forward. Our board and management team believe that putting eBay and PayPal on independent paths in 2015 is best for each business and will create additional value for our shareholders."
eBay is a leading global commerce platform that has benefited from PayPal. PayPal is already strong on its own, rapidly growing as a global payments leader because it has been part of eBay.
"eBay has been a leading innovator in the world of commerce for almost 20 years; it's an incredibly special business," said Donahoe.
John Donahoe and company CFO Bob Swan will be responsible for leading the separation of each business, with board oversight. This includes determining appropriate management and capital structures for eBay and PayPal, and putting in place appropriate operating agreements.
"Together, eBay and PayPal have delivered substantial value creation for our shareholders," said Donahoe. "We believe eBay and PayPal will continue to do so as separate, independent companies. Tremendous opportunities exist for each business."
Separate Ways, Separate Target
Another thing that motivated the split was the decreasing link between eBay and PatPal. eBay has represented less than a third of PayPal's total payments volume. John Donahoe stated it in a conference call with investors.
Donahoe believed that that volume will fall down. He also added that the separation idea started in 2008, but at that time it didn't make since since eBay still represented half of PayPal's payments volume.
The auction site eBay has grown from a simple auction house to a sophisticated marketplace. With roughly 149 active buyers, the company generated $8.7 billion in revenue in the last 12 months, and it has been growing 13 percent year over year.
But eBay's marketplace may be struggling when it faces the retailing giant Amazon.
On the other hand, PayPal has also grown from a simple online payment system to become a digital wallet for online purchases. Processing $203 billion from its total payments, the company has worked well in building a larger presence in both desktop and mobile.
PayPal, meanwhile, has grown from an online payments business to one that aspires to become your mobile wallet. The business has tinkered with ways for people to use PayPal for real-life transactions in addition to transferring funds online or through its mobile app. The company over the last three years has worked to build a larger presence on smartphones through mobile payments. In 2013, PayPal processed $27 billion in mobile payments out of a total of $203 billion in payments altogether.
With more than 152 million active registered accounts, PayPal's revenue over the last 12 months marks at $7.2 billion. That represents a growth rate of 19 percent over the previous year. PayPal handles one in every six dollars spent online today, eBay said.
But it too faces competition. As PayPal struggles to become a preferred mobile payment wallet, it faces a new challenger: Apple Pay, a mobile payment service by one of the largest multinational corporation Apple.