NEW YORK (TheStreet) - Billionaire activist investor Carl Icahn's proposal to split eBay's (EBAY) fast growing PayPal business from the company's online auction marketplace may boil down to one question: Can eBay still convince Wall Street it is the next Amazon (AMZN)?
For eBay management and shareholders that may be the hundred billion dollar elephant in the room. Currently, eBay carries a stock market capitalization of $71 billion while Amazon carries an over $183 billion market cap.
After a series of what appear to be extremely well-timed acquisitions and a plan to invest heavily in its core online marketplace, eBay still appears to be running alongside Amazon in the world of online retail. It also has managed to keep some type of pace with Amazon, amid a shift in consumer spending habits that has crushed shares in big box retail outlets like Sears (SHLD), Best Buy (BBY) and even mighty Wal-Mart (WMT).
Maybe in the race for online retail riches, Amazon has been the hare and eBay has been the turtle? Still, eventually eBay shareholders are going to want to see signs that the company is gaining ground on its larger competitor.
We don't yet know the full extent of Icahn's proposals or even the size of his investment in eBay. However, it seems clear that his plan would rest on the idea that eBay is not succeeding and should begin to farm out the value of its component assets for the benefit of shareholders.
PayPal, which Keefe, Bruyette & Woods analysts value at between $25 billion and $46 billion depending on whether it is a part of eBay or split off as an independent company, is the crown jewel asset that Icahn has targeted. According to a disclosure made by eBay on Wednesday, he believes PayPal would be worth more if it were made independent.
EBay, for its part, said on Wednesday it has already taken an "in depth" look at a PayPal split and decided that the payments platform holds more value for shareholders within the wider company.
They don't currently appear willing to take up Icahn's proposal to split-off PayPal. EBay did say Icahn has made two appointments to the company's board of directors, which will be passed onto a nominating committee.
"eBay's Board of Directors has concluded that the company and its shareholders are best served by the current strategic direction of the company and does not believe that breaking up the company is the best way to maximize shareholder value," the company said on Wednesday.
There is a case to be made for eBay's management and its current board of directors.
After all, the company remains one of the most valuable online businesses in America. That comes amid titanic shifts in technology and consumer spending habits, and years of criticism that eBay's foundational auction marketplace is little more than a flea market.
The company has failed less quickly than many expected and has succeeded in ways few might have expected just five years ago.
PayPal, acquired in the aftermath of a late 1990's dot-com bust, has generated extremely high returns for eBay shareholders. The unit was acquired by eBay for $1.3 billion in stock and now would likely fetch a valuation of over $25 billion if it were split off, according to analyst estimates. Between a third and half of eBay's prospective market value is attributable to PayPal, which continues to grow at double digit rates as consumers adopt online and mobile payment platforms.
EBay has also been successful in using acquisitions to keep its online marketplace in lockstep with Amazon. The company's $2.4 billion acquisition of GSI Commerce in 2011 came just before many investors began to fully understand the scope of logistics and fulfillment infrastructure needed to succeed in online retail.
GSI Commerce has allowed eBay to create distribution hubs and relationships with a spectrum of retailers that mirrors Amazon. As with Amazon, the company has been able to quickly adapt its marketplace so that it appeals to shoppers using mobile devices.
The company has also expanded into markets that may be seen as increasingly valuable and where it may have a clear first mover advantage.
EBay's $310 million acquisition of ticket re-seller StubHub came just before a boom in the adoption of smartphone devices and a surge in consumer spending on mobile applications. Under eBay's ownership, StubHub has become the de-facto mobile application that sports and concert fans use to buy or sell a last minute ticket.
Anyone who has used the platform knows that EBay's StubHub application also generates real profit margins and revenue, a still-phantom concept for many of most hyped mobile apps in Silicon Valley.
That's not to say eBay has always been a stellar acquirer or that its management can't improve the company's performance.
Skype, eBay's largest ever acquisition, was an unmitigated failure. Under eBay's umbrella, founders of Skype defected amid C-Suite conflicts and the company was sold at a loss to a consortium of private equity buyers. Those buyers of Skype then re-opened ties with Skype's founders and quickly flipped the company to Microsoft (MSFT) for $8.5 billion, an over fourfold profit. EBay shareholders clearly missed out.
Meanwhile, it is to be seen whether the company's heavy investment in same day shipments and online retail options that are increasingly similar to Amazon will actually pay off for shareholders. There is a prospect that Amazon, above anyone else, is poised to win a binary war for online retail supremacy.
Ultimately, the burden of proof now rests on eBay's current management team. Has the company used smart acquisitions and heavy investment to build a platform that is poised to gain ground on Amazon?
On the surface, eBay may need to better communicate why its payments arm. PayPal needs to be housed within a wider online marketplace and burgeoning logistics powerhouse to optimize value for shareholders. EBay also needs to show that its PayPal arm is keeping tide with a fast-changing mobile payment industry.
Co-founder Elon Musk recently criticized eBay for its slow innovation of PayPal in an interview with PandoDaily and said that the company's current business plan is not all that different from the one in place a decade ago.
Shares in eBay have been stagnant in the past year and over even longer time-horizons, even as Amazon's stock continues to surge to new record highs. Whether Icahn succeeds or not in breaking up eBay may come down to eBay's management making a better case it is keeping pace with its larger rival.
-- Written by Antoine Gara in New York