Making a case for a Paypal spinout:
Time Seems Right for Paypal to Fly
By ROBERT CYRAN and EDWARD HADAS
New York Times
March 17, 2010
Should eBay change its name to PayPal? The company’s auction business is mature, but PayPal, its online payments business, is growing fast. Plans announced on Wednesday to double PayPal’s Asian staff by the end of the year accentuate the point. A better idea than changing the stationery, however, is spinning off PayPal.
Most analysts who follow eBay also cover online retailers like Amazon rather than financial firms like Visa. This can lead to misunderstandings. Before the financial crisis, analysts covering General Electric, for example, focused on the conglomerate’s industrial side and missed big risks in its financial arm.
EBay has the opposite problem: an overlooked opportunity. The company estimates PayPal will generate up to $1 billion in operating profit next year. Put this conservatively on the same multiple as the slower-growing Visa, and its value is over $12 billion, or approaching half eBay’s current enterprise value.
PayPal’s online payments platform is becoming the standard in an industry where winners often gain most of the spoils, yet the company so far has less than a tenth of the $600 billion market for online transactions.
A spin-off would have other benefits. Its link with eBay certainly gave the company rich soil for growth. PayPal’s penetration in eBay sales has increased both at home and overseas, and now reaches around 80 percent in the United States.
That success, though, means PayPal now increasingly has to look outside this protected garden for growth. That would be easier if it were independent, rather than attached to a business that many potential customers regard as a competitor.
EBay might be reluctant to give up its growth engine. But its other businesses should generate around $2 billion in operating profit this year. Put this on a hefty 25 percent discount to the 13 times multiple on which peers trade, and it’s worth $23 billion according to research from FBR Capital Markets.
Throw in its minority Skype stake — worth nearly $2 billion — and eBay’s parts are worth $37 billion, or a premium of more than 20 percent to the company’s current enterprise value. It’s time for PayPal to prepare to leave the nest.
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