EBay Stock Pops on PayPal Spin-Off Talk - So Why Is Carl Icahn Silent?

You'd think Carl Icahn would be bragging right about now.

It was reported yesterday (Thursday) that eBay Inc. (Nasdaq: EBAY) has been telling candidates for the job of PayPal chief executive that the company was mulling a spin-off of the payments business. The news pushed eBay stock up nearly 4.7% to $55.89.

That's just what Icahn wanted when he launched a futile but nasty campaign in January to force eBay Chief Executive Officer John Donahoe to spin off the PayPal unit to unlock shareholder value. Icahn, one of the best-known activist investors in the world, now holds a 2.5% stake in eBay stock. (He held a 2.2% stake in January, but added 3 million shares to the position in the second quarter.)

Yet he's been curiously silent on the matter since the report surfaced.

The report first appeared on the news website The Information yesterday, citing two unnamed sources that eBay executives have told the candidates that a PayPal spin-off could come as soon as next year.

EBay would not confirm the report, but a spokesperson did not deny it, either.

"The board will continue to assess all alternatives to create that long-term value and to enhance the growth and competitive positions of both eBay and PayPal," eBay spokeswoman Amanda Miller said.
ebay stock
What's strange about all this is that in the months Icahn was tangling with Donahoe, the company was adamant that eBay and PayPal were "better together," apparently refusing to even consider a spin-off.

And that campaign was unusually personal, with Icahn making public several nasty letters that he sent to Donahoe, including one in which he criticized Donahoe's "inexcusable incompetence" in selling Skype to venture capitalist Marc Andreessen for about half of what it was worth.

But the acrimonious fight ended suddenly and unexpectedly, with Icahn getting two seats on eBay's board (another of his demands) while backing off from his quest to get the PayPal unit spun off.

The truce came after the two men met, and makes a whole lot more sense now in light of this week's news...

What Really Happened with Carl Icahn and eBay

At the time, the truce seemed odd. Icahn, hadn't changed his mind, but suddenly became a model of patience - something out of character for the usually relentless activist investor.

"I continue to believe that eBay would benefit from the separation of PayPal at some point in the near future and intend to continue to press my case through confidential discussions with the company," Icahn said then.

If The Information report is true (and it has the ring of truth), it raises some questions as to what role Icahn played.

The first and most obvious possibility is that Icahn simply continued to make his case in confidence to a reluctant Donahoe, and eventually convinced the CEO that the PayPal spin-off is a good idea.

But a more intriguing possibility is that eBay was already considering an eventual PayPal spin-off before Icahn launched his campaign - the company simply wasn't ready to make its plans public yet.

So when Icahn starting making noise in January, eBay was in a tough spot. It didn't want to reveal its long-term plans and knew Icahn would not give up easily.

When the two men finally met in April to settle matters, it's probable that Donahoe took Icahn into his confidence, telling him that the spin-off already was on the table and that he just needed to be patient. To sweeten the deal, he gave Icahn the two board seats he wanted.

That would certainly explain the sudden end to an ugly proxy fight and the warm statements both men made at the time. And why Icahn has been so quiet the past couple of days - this is old news to him.

That only leaves one more question: What would the spin-off of PayPal really do for the eBay stock price?

What a PayPal Spin-Off Would Mean for eBay Stock

PayPal's importance to eBay's earnings has grown since the e-commerce giant bought PayPal in 2001.

In the most recent quarter, PayPal contributed $1.95 billion of eBay's total $4.37 billion in revenue. And PayPal's revenue was up 20% year over year, while the Marketplaces business grew revenue just 9%.

Tesla Motors Inc. (Nasdaq: TSLA) CEO Elon Musk - a PayPal cofounder - said earlier this year that the spun-off company could be worth $100 billion on its own. Note that eBay's current market cap is about $69 billion.

And with mobile payments on the verge of exploding into a $626 billion market by 2018, PayPal's value could dramatically increase.

Spin-offs are almost always great news for shareholders, and with PayPal's potential the same should hold true for eBay stock.

Once the spin-off becomes official, current eBay shareholders will get a nice bump, and later will probably receive shares of a new PayPal stock, or possibly cash depending upon how the deal is structured.

Further down the road, both companies should benefit from the split, as eBay will be able to focus its efforts on improving its Marketplaces business.

As a part of eBay, PayPal has not kept pace with the latest developments in mobile payments; becoming a separate company will allow it to better exploit the opportunities in that sector.

As for Carl Icahn, he's moved on. On Wednesday he disclosed an 8.48% stake in troubled Hertz Global Holdings Inc. (NYSE: HTZ).

Follow me on Twitter @DavidGZeiler.

UP NEXT: One good thing about being an Internet company like eBay is that it's easier to spot new tech trends that could benefit you. We recently learned that the company is very close to offering Bitcoin payment as an option via its Braintree subsidiary. Here's why PayPal could be next...

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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