PayPal's increasingly star-crossed IPO is still expected to price this week, syndicate sources say, but serious doubts exist as to whether it can stand any more surprises. The company, which sells an electronic-payment service that is popular with users of eBay ( EBAY), dropped two more bombs in an amendment to its registration filing Monday with the Securities and Exchange Commission. PayPal said in the filing that the state of Louisiana had ordered it to stop providing its service there until it obtains a money-transmission license. In fact, Louisiana, California, New York and Idaho all have notified the company that they believe it is or may be an unauthorized banking business. The company said it has taken steps to address the states' concerns but can't be sure they'll work. "This could end up being a long row of dominoes, if other states pick up on it," said David Menlow, president of IPOfinancial.com. "A complaint like this is very detrimental to the stock. "Right now, the perception is PayPal's revenue-growth curve is shaped like a hockey stick," said Menlow. "If there's concern Louisiana isn't going to be the only state barring transactions, it could sour people from the aggressive posturing they've had on this offering."
That perception of white-hot growth is what's keeping the offering on the table. One investor who spoke to TheStreet.com pointed out that PayPal is still turning out user growth at an average of 18,500 per day, and said that's why he still likes the deal. The company also has stunning top-line growth, posting fourth-quarter revenue of $29.2 million, an increase of 54% from the previous three months. Louisiana is said to have accounted for 0.9% of PayPal's transaction volume through September 2001. "This is added risk you'd expect to show up in economic terms," said Marc Baum, chief executive of IPO.com. "But there's been no lowering of the offering price." The company originally planned to sell 5.4 million shares Feb. 6 at between $12 and $14, for proceeds of up to $76 million. Syndicate sources said the deal still is expected to price Thursday and open Friday.
In another development, PayPal disclosed that its director of communications had contacts with the author of a research note on electronic payment systems, two days before the IPO was expected to debut. That could be considered an attempt to unfairly boost the price of PayPal's newly issued stock. The PayPal offering was previously delayed from Feb. 6, because of a patent-infringement suit by one of its competitors. On Feb. 4, the competitor, CertCo, filed a suit alleging violation of its electronic-payment and transaction-system patent. On Monday, PayPal filed a response, denying CertCo's claim, asserting its patent is invalid and making counterclaims for a declaratory judgment of noninfringement. Some experts raised questions about CertCo's suit, saying it seems unlikely that the company did not know about the alleged patent infringement six months or year ago. "The lawsuit is being done to create maximum damage," said Menlow. "I'm not discussing the merits of the case, but the timing of it is definitely suspect. These are corporate wars at their best." Still, if PayPal were found to infringe the patent and it is unable to obtain a license, it could be required to restructure its payment system, stop offering it or pay substantial damages, the company said in an amendment to its filing with the SEC on Monday. RealMoney.com commentator Michael Falbo contributed to this report.