Will eBay Buy South Korea's Gmarket?
eBay ( EBAY) should be trying to buy Gmarket ( GMKT) -- that is, if it isn't already. On Wednesday, the Seoul Economic Daily reported that eBay was in talks to purchase the South Korean online marketplace operator, sending Gmarket's shares up more than 8%, and suggesting that the market believes there might be something to the speculation. And there should be. An eBay bid makes a lot of sense, particularly right now. Rumors of a possible deal have surfaced before, but eBay needs to do whatever it can to reignite growth in its core marketplaces unit, which investors have focused on despite strong showings in the company's other divisions.
Snapping up a leading Asian e-commerce player -- given the region's strong growth in online marketplaces -- could be what it takes to get investors back behind the stock. Gmarket would be a particularly attractive candidate for eBay, says Cowen analyst Jim Friedland. Gmarket essentially has came out of nowhere -- it was founded in 2000, and only went public in 2006 -- but already has a larger market share in South Korea in terms of Gross Merchandise Volume (GMV), the amount of goods shipped over its platform, than eBay, according to Friedland. And Gmarket's volume is also growing at a higher clip, Friedland says. The key to Gmarket's success was lowering listings fees it charges sellers when compared to eBay and waiving processing costs. That forced eBay into a brutal price war, since listings fees are a source of revenue for the company.
Buying Gmarket gives eBay a way to boost its auction growth rate by bringing on board a company that is growing even faster: In the third quarter of 2007, revenue from eBay's core auction business grew 26% year over year, according to a Dec. 26 research note by Piper Jaffray analyst Aaron Kessler. But analysts expect Gmarket to grow its revenue 43% in its fourth quarter -- despite a year in which eBay has been widely criticized for jacking fees in order to boost revenue, while Gmarket has pursued a low-fee strategy to gain market share. South Korea also happens to be a pretty substantial market for eBay already. Friedland estimates that between 10% and 15% of the company's overall revenue comes from the region. "It's sizable enough already so that if their performance there flopped, they would feel it," he says. "And if it was huge, it would help their numbers as well." Still, Friedland says that eBay's bid for Gmarket probably wouldn't withstand the scrutiny of South Korean antitrust regulators, who tend to use the same criteria as their U.S. counterparts. A combined eBay and Gmarket would command north of 90% of the online marketplaces business, he says. But given how much eBay has to gain -- and how little it has to lose -- the company should still try.
For starters, there's the often whimsical approach that regulators use to define which markets a company competes in -- a decision that plays a key role in deciding whether a deal gets the go-ahead. Take Google's ( GOOG) bid to acquire online ad serving firm DoubleClick, which just received the green light from the Federal Trade Commission in December. Google argued that it competed in the search-ad business, whereas DoubleClick was in the display-ad business and that the two were, in fact, distinct. Opponents of the deal, who ranged from Microsoft ( MSFT) to AT&T ( T), argued that the two should be looked at as one business -- online advertising. In the end, the FTC seemed to buy Google's argument. That same ambiguity exists for eBay and Gmarket. When it comes to overall e-commerce in South Korea, the combined companies would only control about 40% of the market, according to Friedland's estimate -- a far cry from the 90% if they were to be defined as strictly "online marketplaces." If South Korean regulators saw things eBay's way -- which they very well could, given the political clout and connections companies like eBay and Gmarket are likely to enjoy in the country -- the company would be in luck. With a deal in tow, eBay could take a major step toward getting what it needs badly -- growth in auctions -- with what it has gobs of sitting around: cash.
Shares of eBay closed Thursday at $32.84, off about 35% since October 2007 amid renewed concerns about the marketplaces business. For the time being, investors seem to be ignoring the stronger performance of units like its PayPal payments business and its Skype telephony service, which despite the company taking a major writeoff in during 2007, continue to show strong user and revenue growth. "We believe eBay's valuation today reflects primarily the lower growth of the core eBay marketplace," Piper Jaffray analyst Aaron Kessler wrote in a research note. "While the core eBay business still represents a significant portion of revenues and profits, we believe investors continue to overlook the higher growth of PayPal, Skype, Shopping.com, StubHub, and classifieds." At the same time, eBay continues to have nearly $4 billion in cash on its balance sheet, according to Yahoo! Finance. That's more than enough to not have to concern itself with using its beaten-down stock to pay the $1.33 billion market cap plus premium for Gmarket. Whether eBay likes it or not, growth in its marketplaces unit is what investors are looking for. And picking up Gmarket could help it do exactly that. The upside from such a deal could help it easily make up for the cost of the transaction in the form of added value to its share price very quickly. Sure, the deal may not make it over the regulatory hurdle. But it's a leap that eBay should be more than willing to take.