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PayPal's Dilemma: Why It Needs eBay and Vice Versa

Stocks in this article: EBAY AMZN

Polling eBay Shareholders

On Wednesday, Bernstein Research analyst Carlos Kirjner published a poll of 178 eBay investors that indicated investors were undecided on whether or not eBay should split its Marketplace and PayPal businesses.

Of those that responded, 51% said a split was not wise, while 43% supported a split. Nearly 30% of shareholders responded that Carl Icahn should get a board seat, while 55% said eBay's board composition should change. Sixty percent of respondents said unlocking PayPal's value was the best reason for a split.

"[We] are in the minority and are not convinced that there is indeed a large value creation opportunity simply from separating the businesses. We think there are multiple cross-subsidies between Marketplaces and PayPal and a cursory valuation of PayPal as a standalone entity often will fail to account for the potential elimination of these cross-subsidies," Kirjner said.

"In other words, the relationship between the pieces would be identical to today's and all we would get (again, in theory) is a valuation bump," the analyst concluded.

Place Bid, Buy It Now

At about the same time Swan took the stage at the Morgan Stanley conference, Reid Hoffman published an extremely supportive letter of eBay's current strategy and accused Icahn of focusing on short-term trading profits over long-term growth. "It's classic market exploitation," Hoffman wrote

By Thursday morning, Icahn responded.

"We have not yet begun to fight," the activist wrote on a website he recently created to champion shareholder rights. In late February, Icahn filed a proxy solicitation to split PayPal from eBay and nominate two new directors to eBay's board at the company's annual shareholder meeting later in 2014.

Sometimes, amid the cacophony of an activist campaign and a corporation digging in its heels, the narrative moves to tangential subject matter.

In the eBay case, Icahn has identified two board members, venture capitalist Mark Andreessen and Intuit (INTU) founder Scott Cook and their perceived conflicts of interest as the flagpole for his campaign.

Icahn has painted both Andreessen and Cook as the Manchurian Candidates of eBay's board, who've used their seats to invest in competitors to PayPal. Icahn also accused Andreessen of self-dealing in eBay's sale of Skype to private equity firm Silver Lake Partners, a deal which his VC firm Andreessen Horowitz had a 3% stake that paid off handsomely when the business was sold 18-months later to Microsoft for $8.5 billion. 

EBay founder and Chairman Pierre M. Omidyar rejected those assertions earlier in March and Andreessen took to his blog to reject Icahn's claims.

On Thursday, Andreessen categorically denied Icahn's allegations surrounding the Skype deal, which it is worth noting, eventually made money for eBay shareholders.

"Mr. Icahn is making up a fake conspiracy theory out of thin air," Andreessen wrote, citing a Wall Street Journal article that said Microsoft passed on Skype when eBay put it up for sale. Seventy percent of the business was sold to Silver Lake for $2.75 billion in 2009. In 2011, Silver Lake flipped Skype to Microsoft for $8.5 billion.

EBay shares were gaining over 1% in Thursday trading at $59.48. Shares have gained over 11% in the past twelve months.

-- Written by Antoine Gara in New York

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