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eBay Puts Faith in Bill Me Later Purchase

The company looks to weather the storm with Bill Me Later, an online payment service.
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moves to strengthen its business come at a difficult time as investors continue to sour on the stock amid an economic downturn.

Shares fell $1.07, or 5.7%, to $17.87, even after the online auction giant

announced a 10% reduction

of its workforce, slashing about 1,000 jobs.

CEO John Donahoe acknowledged that eBay is feeling the impact of a worsening economic environment, as well as a strong dollar that is hurting foreign currency exchange for its businesses overseas.

Nonetheless, he spent most of a Monday conference call touting eBay's latest acquisitions -- also announced on Monday -- as a way to build the company and improve its long-term prospects.

eBay agreed to purchase Bill Me Later, an online payment service, for $820 million in cash and $125 million in outstanding options. It also acquired Denmark's online classifieds site,, and vehicles site, for $390 million in cash.

Donahoe described the purchases in Denmark as "a strategic and effective use of our cash outside of the United States," noting that eBay made its foray into online classifieds only four years ago and that it has grown into a $250 million business, with margins of over 30% and a growth rate of over 60%.

Bill Me Later, however, may prove to be a trickier venture. Although it provides eBay customers with another online payment option besides PayPal, it also raises questions about whether the company should be assuming new credit risks at such a volatile time in the economy.

Bill Me Later allows customers to make deferred payments for their purchases online and also offers a promotional financing service.

Jeffrey Lindsay, an analyst with Sanford Bernstein, notes that Bill Me Later could be risky for eBay in the short term in the event that customers default on their payments. But the risk is limited, because unlike credit card companies that extend customers a certain line of credit, Bill Me Later only extends credit to cover the price of a purchase. That means if a customer defaults on a payment for that particular purchase, Bill Me Later can prevent him or her from making future purchases.

In the long term, Lindsay says eBay made a good strategic move by acquiring Bill Me Later.

"It gives

eBay a bigger slice of online transaction," he says, noting that right now PayPal collects about 3.9% in payments from transactions made online using the service while Bill Me Later collects about 12.7%.

eBay points out that Bill Me Later's credit-risk model and analysis "have consistently performed better than the consumer credit industry average. Combined with eBay's and PayPal's best-in-class transactional date monitoring, this expertise will bolster the company's ability to drive down risk in the payment system and provide customers with even safer, faster ways to pay online."

Imran Khan, an analyst for J.P. Morgan, described the Bill Me Later acquisition as "strategically positive."

"The business will present a cross-selling opportunity for PayPal, and could help PayPal gain additional momentum going forward," he wrote in his latest research. "The Buy Me Later business has significant reach among higher-volume merchants, whereas PayPal's penetration is stronger with smaller sellers."

He added that "the current credit environment could offer PayPal an opportunity for market share gains as others tighten credit."

eBay may have also stepped in the way of its rival,


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, from making a play for Bill Me Later. Lindsay points out that Amazon had a 10% stake in Bill Me Later.

"It stopped Amazon from being a formidable competitor to PayPal," Lindsay says of eBay. "It was a good offensive and defensive move."

All this, however, may not be enough in the end. eBay's stock has dropped 56% from its 52-week high. And some think the company has been too slow to come up with changes to revitalize the business.

Derek Brown, an analyst for Cantor Fitzgerald, says that if eBay had acted four or five years sooner, it might have made a difference.

"We have not been particularly optimistic and today's news makes us even less optimistic," he says.