Could PayPal Become the Next VMware?

NEW YORK (TheStreet) -- If eBay (EBAY) sold off 20% of its PayPal stake to the public it could turn the payment services company into one of the hottest stocks on Wall Street.

Activist investor Carl Icahn Wednesday called for eBay to do just that, in contrast to his request in January for the company to spin off the entire holding.

Although eBay rejected Icahn's call, it remains an interesting idea.

Icahn's latest message to eBay shareholders says that if eBay sells a small portion of its PayPal holding, then PayPal can retain the benefits of being a stand-alone stock while also maintaining the efficiencies of being a part of its parent.

A partial separation of a hot subsidiary company is not a new idea. Back in 2007, EMC (EMC) spun off 15% of VMware (VMW). VMware has since multiplied in value more than 100 times what EMC originally paid to acquire it.

VMware makes software that allows a computer to run different operating systems, or several versions of the same operating system simultaneously, enabling corporations to improve the efficiency of the computers in their data centers and reduce spending on hardware, electricity and maintenance over time.

Many investors believed that the true value of VMware was lost when it was part of EMC because of the stock market's tendency to undervalue the stocks of conglomerate businesses.

VMware doubled in price the first few months after the initial public offering, but suffered the same downturn in share price as other U.S. companies during the 2008 financial crisis.

Since the downturn, however, the stock has risen to a market cap of $47 billion, making it worth more than 100 times the $365 million that EMC originally paid to acquire it in 2004.

If eBay follows the path of EMC and spins off a small portion of PayPal, it could generate substantial cash to help improve other areas of its core business.

EMC used its VMware payout to expand its workforce and improve salaries, while Icahn stated that the proceeds of the PayPal sale would give the company much-needed cash that could possibly fund future acquisitions.

eBay purchased PayPal in 2002 for $1.5 billion. In my view, if eBay did a partial spinoff, the combination of unlocking PayPal's stand-alone value and trader hype could lead the payment company's new shares to grow significantly.

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At the time of publication, the author had no positions in any of the securities mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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