The split, which is expected to occur in the second half of 2015, will create two standalone businesses that will "capitalize on their respective growth opportunities in the rapidly changing global commerce and payments landscape, and is the best path for creating sustainable shareholder value," the company said in a press release.
EBay CEO John Donahoe and CFO Bob Swan will step aside once the separation is complete. Devin Wenig, currently president of eBay Marketplaces, will become CEO of the new eBay company. Dan Schulman, previously president of American Express' (AXP) Enterprises Growth Group will become CEO of PayPal following the spinoff.
The spin off decision is an about face from eBay, which fought with activist investor Carl Icahn earlier this year over the issue. Icahn and eBay came to a settlement in April. Industry analysts say the split was likely a recent decision in answer to new competitive forces, such as Apple (AAPL) Pay. Here's what analysts said.
Sanjay Sakhrani, Keefe, Bruyette & Woods (Outperform; $65 PT)
We are not entirely surprised by the separation announcement given investor activism coupled with a challenging operating environment and heightened perceived competitive threats (e.g. Apple Pay). While there are clearly a number of unknowns related to the separation, we think an important component will be the standalone profitability of PayPal, excluding the investment initiatives being made within the payments segment to build on the company's omni-channel strategy. This strategy included investments made to develop the company's off-line presence, which have seen limited traction. Also, we think a separately traded PayPal might have better success in securing a higher multiple than what is implied in the current total enterprise valuation. Finally, we believe a separate PayPal might more easily be acquired as well.
After the company's annual strategic review, management and the board have now come to the conclusion that the companies are better apart with a series of operating agreements that will preserve important synergies between the two businesses. This change in strategic direction is a function of several developments over the last nine months, in our view. (1) Competition in both payments and eCommerce/marketplaces has accelerated with new broad global players as well as niche marketplaces; (2) former PayPal President David Marcus left the company for Facebook in June, 2014, and a standalone PayPal CEO role allowed the company to recruit highly tenured payments leadership (today eBay also announced that American Express executive Dan Schulman will join PayPal immediately as President and CEO designee for PayPal post separation); and (3)Technology/eCommerce M&A has accelerated and the separation of eBay and PayPal puts both businesses in play, which in our view could create substantially more value than our published SOTP. Our current SOTP analysis values the combined company at $67, an 18% premium over where the stock is currently indicating ($56.60). Management expects the tax-free spinoff to be completed in 2H'15.
Chad Bartley, Pacific Crest Securities (Sector Perform)
At this point, we are not sure if a standalone PayPal is in a better position to compete in the rapidly evolving digital payments landscape. It is unlikely that being part of eBay, and benefiting from its cash flow, has prevented it from investing in the business, and forming partnerships with credit card companies, banks and retailers. At this point, we continue to see mounting threats from Apple, Google, Visa and others to PayPal's business in desktop and mobile commerce outside of eBay's marketplace.
Justin Post, Bank of America Merrill Lynch (Buy; $62 PT)
We see the following positives: 1) positions each company to operate more efficiently with better aligned capital structures and employee incentives; 2) we think sum-of-parts valuation will be in focus for eBay, which is a more favorable valuation framework for the stock (vs P/E or P/E/G); and 3) makes each business unit more acquirable.
We see the following high-level risks: 1) PayPal's profitability is tied to eBay, and spin will highlight on lower margins of the merchant service business; 2) business disruption during the spin process; and 3) potential that spin is partially a reaction to new payments competitive threats or weak marketplace operating performance vs the 2013-2015 plan outlined at the 2013 analyst day.
Shebly Seyrafi, FBN Securities (Sector Perform; raising price target to $65 from $60)
We believe that this could be a positive development for EBAY as it creates more focused entities and as it allows investors to invest more directly in the faster-growing business (PayPal). Remember, when Carl Icahn first made loud suggestions about EBAY splitting off PayPal, the stock rallied.
TheStreet Ratings team rates EBAY INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate EBAY INC (EBAY) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- EBAY INC has improved earnings per share by 8.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, EBAY INC increased its bottom line by earning $2.18 versus $1.99 in the prior year. This year, the market expects an improvement in earnings ($2.97 versus $2.18).
- The revenue growth significantly trails the industry average of 43.6%. Since the same quarter one year prior, revenues rose by 12.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- Although EBAY's debt-to-equity ratio of 0.28 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.20, which illustrates the ability to avoid short-term cash problems.
- Net operating cash flow has increased to $1,494.00 million or 47.77% when compared to the same quarter last year. In addition, EBAY INC has also modestly surpassed the industry average cash flow growth rate of 41.40%.
- The gross profit margin for EBAY INC is currently very high, coming in at 74.99%. Regardless of EBAY's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 15.48% trails the industry average.
- You can view the full analysis from the report here: EBAY Ratings Report
--Written by Laurie Kulikowski in New York.