Buyout Firms Gear Up for Swipe at PayPal

NEW YORK (The Deal) -- Make no mistake about it: private equity wants PayPal But a combination of a bevy of bidders, as well as the industry's newfound disdain for club deals, could push an asset valued at more than $35 billion just out of their range.

With activist Carl Icahn rattling his saber at owner eBay's (EBAY) digital gates and the company facing lackluster stock performance, a spinout into private ownership for PayPal could be the optimal move. More than a decade after eBay's acquisition of PayPal (then, at a comparatively paltry $1.2 billion), the asset's dependence on the marketplace has been turned into eBay's reliance on its subsidiary, now a fully developed technology company that is fully capable of standing on its own.

There's only one thing standing in private equity's way: Everyone else. Sources said that, while they expected PE players to perk up their ears if and when PayPal hits the block, many potential big technology bidders -- Google (GOOG) Apple (AAPL), even Facebook (FB) -- would have traditional payment processors and credit card companies -- Visa (V) and American Express  (AXP) -- nipping at their heels in a rush to outbid each other.

"It's a rare asset because you can expect that guys from a number of sectors will come out," one banker told The Deal.

Still, if there were a time for PE firms to take another stab at a more successful version of an leveraged buyout approaching $40 billion, factors are aligned for that to happen now, more than at any other point in recent history.

One private equity general partner, whose firm not too long ago reeled in more than $10 billion to put to use in M&A, called the prospect "difficult but not impossible" before saying that, until eBay and its activist settle their differences, he wouldn't even instruct his lieutenants to lift so much as a calculator.

"It's too early to tell," the PE pro said, noting that the company has not yet even made a decision as to whether or not it will divest PayPal, or spinout the company.

Private equity firms rarely commit more than 10% of a fund to any particular transaction, and the LBO shops out there that are likely to have the expertise as well as the balance sheet to support a transaction for PayPal number less than 10. Yet, now, PE firms have more dry powder than ever before: according to Dow Jones & Co. research, the $216 billion raised by LBO shops last year is the biggest since 2008. A substantial portion of those funds raised also went to large-cap LBO shops and, all of a sudden, the $10 billion buyout fund is back in vogue.

One source suggested that four private equity firms together could easily put up the $6 billion that, in the current debt market, might go far enough to leverage a deal. All they would need is for eBay to retain a stake in its spinout, which is exactly what the company did when it unloaded Skype Technologies to a private investment consortium.


That deal proved doubly wise for eBay: the company profited off its initial exit, but retained a 30% stake, which substantially appreciated by the time it was sold most recently to Microsoft Corp. in an $8.5 billion deal.

In 2005, eBay spent $1.3 billion in cash and another $1.2 billion in stock to buy Skype, then an independent public company. By 2009, when it became apparent that the voice-over-Internet-protocol company was a poor fit for the e-commerce company, eBay sold Skype at a $2.75 billion valuation, to a consortium of Skype's founders, the Canada Pension Plan Investment Board, private equity firm Silver Lake Partners and venture capital firm Andreessen Horowitz.

But eBay retained a 30% equity stake in the company as part of the deal. It would only take about 18 months for the new owners to sell to Microsoft after increasing the company's valuation to $8.5 billion.

An executive who worked at Skype when the company was absorbed into eBay said what held back its valuation was a litany of integration projects that the buyer foisted onto it - and that, free from these constraints, the company was more successful as an independent entity. However, the source said, existing within the infrastructure of a developed company likely helped both Skype and PayPal to mature as corporate entities.

Whereas, in 2005, the Skype deal was done to bring a new communication product onto the eBay platform, buying PayPal represented a well-thought-out plan to add payment functionality to eBay's auction block. Now, with both the marketplace business profitable, and the payment processor reaching maturity, if not, simultaneously, peak valuation - the former Skype exec suggested it could be the right time to sell PayPal.

Silver Lake -- the lead PE player in the buyout -- plunked down nearly $1 billion, and tripled its invested capital virtually overnight on the Skype transaction, according to a source. No wonder big-name buyout shops would salivate if PayPal puts a For Sale sign in its digital window.

Tethering itself to a mature asset that could easily be resold in a period of time -- similar to the Skype situation -- should appeal to eBay. Right now, at what one analyst pegged at a $38 billion valuation, eBay can only be a winner on PayPal, having spent just over $2 billion for its primary assets -- $1.2 billion for PayPal, and another $945 million on BillMeLater in 2008.

One source notes that holding onto a stake and putting the company in the hands of operations experts might be its best return on investment generator. And, as another points out, the abundance of discount debt comes at a time when non-traditional players are stepping up to support transactions, be it Microsoft backing Michael Dell's LBO, or Warren Buffett playing lender for H.J. Heinz's buyout.

"It's definitely not the most likely scenario," the source noted, when pressed to offer odds of a PE-PayPal transaction, "but it wouldn't be unheard of, either."

Representatives from eBay declined to comment, except to reiterate its response to Icahn in which the company said that it had explored a spin off or separation of PayPal and had concluded it didn't believe it would suit its current strategic direction.

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