eBay will likely snub the proposals, viewing its technology capabilities, commerce platforms and relationships with retailers as keys to PayPal’s growth
The 2014 proxy season is shaping up as a busy one for Carl Icahn. As if pressuring Apple to expand its planned share repurchase program to $150 billion weren’t enough, the legendary corporate raider is now threatening a proxy contest at eBay if his proposals for a PayPal spinoff and two board seats are rejected.
According to eBay, Icahn owns a scant 0.82 percent stake in the e-commerce company. On January 18, the deadline for doing so, he nominated two employees from his investment firm, Icahn Enterprises, to eBay’s board, calling CEO John Donahoe the same day to warn him and briefly discuss his recommendations, as reported in the Wall Street Journal.
Icahn believes there would be a lot of interest in acquiring a standalone PayPal, which its tethering to eBay is impeding. PayPal’s revenues are growing faster than those of eBay’s marketplace business, but the latter is more profitable.
EBay has increased PayPal’s annual revenues to nearly $7 billion from under $1 billion 10 years after buying the company for $1.5 billion in 2002. It continues to invest in the business, just last year spending $800 million to buy Braintree, a mobile payments business, which is being integrated into PayPal, as reported in the Wall Street Journal.
In a statement posted on its website on January 22, eBay said Icahn’s board nominations would be passed on to its Corporate Governance and Nominations committee for consideration, but added that the company ‘has a world-class board of directors with directors who have significant experience in technology and financial services.’
EBay’s board regularly assesses the company’s strategic direction and ‘has explored in depth a spinoff or separation of PayPal,’ according to the statement. The board concluded that eBay and its shareholders are best served by the company’s current strategic direction and that breaking up the company isn’t the best way to maximize shareholder value.
‘As part of eBay Inc., PayPal is able to leverage the company’s technology capabilities, commerce platforms and relationships with retailers, brands and large merchants worldwide,’ the statement said. ‘Payment is part of commerce, and as part of eBay, PayPal drives commerce innovation in payments at global scale, creating value for consumers, merchants and shareholders.’
Stifel Nicolaus downgraded the stock from a ‘buy’ to a ‘hold’ rating on January 23, citing not only ‘faltering’ revenues and margins ‘to a greater degree than we expected’ but the likelihood of eBay’s rejection of Icahn’s proposed spinoff.
‘Our prior rating was largely based on a sum-of-the-parts’ valuation,’ equity research analyst Jordan Rohan and his team wrote in their note. ‘That methodology makes less sense if the management team will rebuff spin-off ideas, for whatever reasons, strategic or otherwise.’
Stifel called the likely brush-off of Icahn’s recommendations ‘really disappointing,’ even though it acknowledged that an all-out spinoff of Paypal from eBay’s marketplace business doesn’t make sense currently.
‘[A] partial spin would address shareholder concerns without unraveling a business partnership and creating distractions,’ the note said. ‘An IPO of 15 percent of Paypal would potentially provide valuation transparency, access to a cheap source of US-based cash, fund an aggressive buyback, and create the possibility that a more permanent split could happen down the road.’
The Vanguard Group, eBay’s largest institutional investor, declined to comment on Icahn’s proposals.
Charles Elson, who heads the Weinberg Center for Corporate Governance at the University of Delaware's business school, believes Icahn would prefer to avoid an all-out proxy contest if he could. But if the board formally rejects his recommendations, he can take them to the shareholders, Elson says.
‘He has made a case that [the board is] not being effective in reviewing management [strategy] and that a different strategy would be effective,’ says Elson.
