NEW YORK (TheStreet) - Carl Icahn changed his position in a scorched-earth campaign he's running against e-commerce giant eBay (EBAY - Get Report). The billionaire activist now wants eBay to conduct an initial public offering of 20% of the company's PayPal payments division, whereas previously, he advocated eBay spin-off the unit entirely.

Icahn's slight retreat comes about a month into his campaign against the company and its management. Whether or not a changing proposal by Icahn gives eBay an upper hand in warding off the activist as its annual shareholder meeting looms is still to be seen. A sale or full spin-off of PayPal, however, now appears to out of the question.

The Russian Front for eBay

Supportive Shareholders Emerge

In a March 11 preliminary proxy statement, Icahn proposed a slate of two nominees, Daniel A. Ninivaggi and Jonathan Christodoro, to eBay's board of directors. In another proposal, Icahn also sought for eBay to hire an investment bank to spin-off eBay's PayPal division.

"Shareholders recommend that the Board of Directors and management act expeditiously, consistent with effective tax considerations, to engage an investment banking firm to effectuate a spin-off of eBay's Payments segment into a separately traded public company," Icahn's preliminary proxy stated.

In a Wednesday letter to eBay's management, Icahn changed his tune, saying eBay could easily conduct an IPO of 20% of PayPal, allowing the company to retain 80% control of the fast-growing asset. Icahn also conceded that there were so-called synergies between eBay and PayPal, which could be preserved in a minority stake offering.

"Before the transaction is consummated the companies could enter into a long-term, commercially viable contract, preserving all synergies. This type of relationship is customary in partial IPOs and would be particularly important for eBay as currently, outside of PayPal, there does not exist a global payment processing solution competent enough to service eBay's users," Icahn wrote.

Icahn also indicated that PayPal's market position may be stronger than previous letters, where he compared the asset to fallen tech sector stars like Eastman Kodak.

"Luckily for PayPal, competitors such as Google, Apple and many others do not yet have the same comparable scale and product offerings," Icahn said on Wednesday.

Those relatively positive comments contrasted to a letter released by the activist earlier in the week, which stated, "I believe that if it is left as a division of eBay, PayPal may well go the way of other former technology greats such as Blackberry, Dell, Eastman Kodak, Polaroid, Nintendo, Xerox, Sony, Palm, and AOL...  Sadly in our opinion and the opinion of others eBay does not have years to wait."

Icahn said on Wednesday a partial IPO would highlight the value of PayPal, provide the payments division with an independent and focused management team, would provide currency for acquisitions and top hires, while preserving synergies and avoiding synergies of eBay's current conglomerate structure.

"We believe a standalone PayPal would be more able to pursue potential strategic partnerships with other industry leaders, such as Visa, MasterCard, Google, Facebook, Alibaba, etc., that could solidify PayPal's long-term relevance," Icahn wrote. Finally, Icahn said a separation of PayPal and eBay would allow for a reconstitution of the company's board of directors.

EBay quickly responded to Icahn by rejecting his new proposal.

"Will a partial spin make PayPal more competitive? Will it accelerate growth? Will it be possible without distracting PayPal at a critically important time? And, importantly, will it create sustainable value for shareholders over time?," the company asked.

"Today, we believe the answer to these questions is no. Not now," eBay said. "In the future, our board will continue to evaluate all strategic options and make the right decisions for shareholders. But today, PayPal and eBay are better together," the company concluded.

EBay's decisive response to Icahn indicates there may be further twists in a tech sector activist battle that compares to campaigns run against Dell and Yahoo! (YHOO) in recent years. The company has trotted out a long-list of defenders of the company's management, its board of directors and its strategy in a fast-changing e-commerce landscape.

Icahn has sought to undermine the credibility of eBay board members Mark Andreessen, Scott Cook and Fred Anderson. Those well-connected Silicon Valley players have shown an ability to respond to Icahn's assertions, something that may have been slightly lacking in the cases of Dell and Yahoo! (YHOO). In fact, Icahn may find his match in Andreessen, one of the most prominent and opinionated venture capitalists in Silicon Valley.

What's Next?

While activist campaigns run by Icahn and corporate resistance often devolve into a back-and-forth of accusations, the biggest question for shareholders is: What happens next?

Icahn's current preliminary proxy asks for two board nominations, a spin-off of PayPal. Meanwhile, the activist has asked that eBay reveal all of the documents surrounding the company's sale of Skype to Silver Lake Partners. EBay believes it has provided Icahn with all of the available information on the transaction, however, the activist doesn't believe the company has been forthcoming.

"We've made a good faith effort to provide Mr. Icahn with relevant documentation about the Skype transaction, but clearly he would rather pursue frivolous litigation as part of his standard playbook," eBay recently said.

Whether Icahn will amend his preliminary proxy or whether he will continue to pursue shareholder litigation are two major issues to watch in coming days and weeks.

Meanwhile, even though eBay immediately rejected Icahn's new proposal of a 20% PayPal IPO, that changing recommendation indicate a rising prospect of a settlement. San Jose-based eBay has made no indication it wishes to settle with Icahn, and vice versa.

Bottom Line: Wednesday's change of course by Icahn against eBay puts every outcome into play except a full spin of PayPal.