In three years time, eBay will account for 15% of PayPal business
By Will Goodbody, Science & Technology Correspondent
What do you do when the child you’ve nurtured from nappies, develops into an adult and becomes increasingly independent? That’s the tough question that has faced eBay in recent years as PayPal grew up and started forging a life of its own.
Founded in the late 1990s, PayPal was bought by eBay in 2002 for $1.5bn, not long after PayPal went public. Initially, there was a strong and obvious mutual dependence. eBay needed a secure, simple and trusted online payments service for its customers to use. PayPal needed a consistent source of reliable business from which to grow.
But the revolution in the mobile payments market, estimated by Forrester Research to be worth $90bn in 2017, meant PayPal quickly started growing more rapidly than its parent. As of today, PayPal has more than 152 million active registered users, with the number of accounts growing 15% in the last quarter compared to the same period last year. Revenues are also rocketing, climbing by 19% over the past year to $7.2 billion. Analysts estimate it contributes to more than half of the value of each eBay share.
Others, however, are vying for a slice of that action. Start-ups like Stripe, founded by Limerick brothers Patrick and John Collison, and Square, have raised hundreds of millions of dollars, and are now snapping at the heels of PayPal. (Indeed it was reported last year that PayaPal had tried to buy Stripe). Also, the introduction by Apple of its cashless payment system, Pay, over the coming months, is likely to shake up the entire industry.
PayPal has beefed up its offering, through acquisitions including that of the payments gateway service, Braintree, last year for $800m. But nonetheless, a quickly expanding company in a fast growing market needs to be nimble. And as a grown up child still living at home with its parents, PayPal lacked that ability to stay out late and come and go as it pleased. It couldn’t easily cut deals with eBay competitors like Alibaba or Amazon, for example.
The writing was arguably on the wall from earlier this year, when Carl Icahn called for PayPal to be spun off eBay. The activist investor, who holds more than 2% of eBay stock, later relaxed his position to a call for the flotation of 20% of PayPal stock when other large investors backed the company’s stance of keeping PayPal in house. Many saw eBay’s mid to long term growth prospects as being stronger with PayPal at its heart.
But since then, something has changed, to such an extent that Icahn’s original strategy has won favour – though eBay says the decision is not a result of shareholder pressure. In its statement today, eBay said it would hive off PayPal next year into public ownership. It said the decision was taken following a regular strategy and structure review by the board, which had concluded that both companies would be sharper and stronger, and more focused and competitive as standalone companies in their respective markets.
It said the decision was based on three factors. Separation would create sharper strategic focus and better position each business to capitalise on growth opportunities as independent companies, it said. It also claimed that the benefits of the existing relationships between eBay and PayPal will naturally decline over time, but can still be optimized in arm’s length operating agreements between the two entities. For example, in three years time, eBay will account for just 15% of PayPal’s business. eBay also maintained that the decision provided the best path for delivering sustainable shareholder value, because both companies will be more agile, focused and flexible.
The spin-off will take place in the second half of next year and ahead of it there will be a management shake-up. What lies ahead for the staff of both companies here is unclear. Paypal’s workforce is due to top 2,900 by 2018 while eBay employs hundreds more in Blanchardstown and Dundalk. The creation of healthier and nimbler companies should mean better growth prospects for both.
But as every older parent knows, the day a grown up child moves out of home, both your and their lives change forever. And not always for the best.
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