EBay agrees to spin off PayPal after pressure from activist
EBay agrees to spin off PayPal after heavy pressure from Carl Icahn
and other activist investors
PayPal had the online payment market pretty much to itself for years
but is facing new competition
Targeting technology's 'pools of stodge'
2014, 5:00 AM
In the 1980s, the
heyday of the corporate raiders, Carl Icahn made a name for himself as
a persistent aggressor.
He went after stodgy, old-line companies — Gulf &
Western, Western Union, Phillips Petroleum, TWA — hellbent to break
them up and "unlock value" where plodding managers and boards had
Now 78, Icahn targets what he sees as the latest
pool of stodge — aging technology companies.
On Tuesday, online marketplace EBay Inc., now
nearly two decades old, agreed to spin off online payments king PayPal
by the end of 2015 after heavy pressure from Icahn and other activist
investors, who expect to profit from a higher post-split market value.
"It's almost a 'no brainer' that these companies
should be separated to increase the value of these great assets,"
Icahn said in a statement.
Attendees walk in front of an EBay and PayPal display at the
Mobile World Congress, the world's largest mobile phone trade
show, in Barcelona, Spain, in February 2013. (Manu Fernandez /
EBay Chief Executive John Donahoe,
who had resisted the move for months (and who will step down as CEO
after the spinoff) said in his own statement: "A thorough strategic
review with our board shows that keeping EBay and PayPal together
beyond 2015 clearly becomes less advantageous to each business
strategically and competitively. The industry landscape is changing,
and each business faces different competitive opportunities and
That review, however, followed a
After EBay resisted Icahn's calls
for heavy restructuring, including a PayPal spinoff, Icahn launched a
proxy fight to control the San Jose company's board. In April, after
much drama, Icahn and EBay reached a truce. Icahn dropped the proxy
fight and agreed with EBay to add business leader David Dorman to the
board — which later conducted the strategic review.
"Icahn is considered Wall Street's
smartest manipulator," said Gary Lutin, chairman of the Shareholder
Forum, which supports long-term investor interests. "But in the
EBay-PayPal situation, his proposed split-up might go beyond
short-term stock pumping to work just as well for long-term enterprise
value. Many people view EBay as a pretty mediocre company."
Venture capitalist Peter Thiel, a
PayPal co-founder who left the company after EBay bought it in 2002,
said the spinoff makes sense.
"The last few years there have been
a number of new payment systems, so having [an independent] focus on
the product will be critical to PayPal," he said on a radio talk show
PayPal, founded in 1998, had the
online payment market pretty much to itself for years, but the
popularity of smartphones and a venture capital boom has attracted new
Apple Inc. introduced its Apple Pay
mobile payment service Sept. 9 with its new iPhone 6 offerings. In his
statement, Icahn took note of the "strong competition" from Apple's
new payment system, and tech analysts said Apple Pay's entrance
undoubtedly played into EBay's decision to say goodbye to PayPal.
"I think they realized they had to
step up their game a lot, and PayPal needed to be separate," said Rob
Enderle, principal analyst at Enderle Group. "The reality is EBay
probably wants to engage Apple as well, so they get access to all
those Apple customers. This frees up both companies to make the
alliances that they kind of have to make "
EBay is hardly Icahn's only target.
He's pestered other technology companies, with mixed success.
In April 2013, Apple agreed to
return $100 billion to shareholders by the end of 2015, after pressure
from Icahn and other shareholders, including David Einhorn of
Greenlight Capital. Later the same year, while under Icahn's fire,
computer maker Dell took itself private for $24.9 billion, a deal that
Icahn isn't the only one applying
pressure. As huge technology companies have built up immense piles of
cash, expanded into arguably unrelated businesses or lost market share
to younger, scrappier companies, activist investors are increasingly
"Historically, Silicon Valley has
not been a bastion of strong corporate governance because they're
founder companies, where founders believe they have the answer and no
one else does," said Charles Elson, a corporate governance expert at
the University of Delaware. "Performance issues, plus governance
issues, equals target."
In August 2013, Hedge fund ValueAct
Capital, unhappy with the performance of its Microsoft Corp. stock,
won the right to a seat on Microsoft's board of directors. A week
earlier, Steve Ballmer announced that he would soon step down as
Currently, Elliot Management Corp.,
with a stake of more than $1 billion in EMC Corp., is agitating for a
spinoff of the computer storage company's VMware software business.
Daniel Loeb, who runs Third Point
Management, said the firm bought 6.5% of Sony Corp. and seeks a
breakup. He contends that splitting the Japanese electronics and
entertainment conglomerate into pieces could raise its stock price as
much as 60%.
At Yahoo Inc., activists aren't
seeking a breakup — beyond the website's large user base, they don't
see much value in Yahoo properties, said Eric Jackson, managing
partner at Ironfire Capital. "The best thing that could happen is if
[a company like] SoftBank buys Yahoo and takes it over," he said.
Another investor, Starboard Value,
is urging Yahoo to merge with AOL.
Meanwhile, some tech companies —
most notably, Google Inc. and Facebook Inc. — have protected
themselves from activists by issuing separate classes of shares, with
majority voting rights going to company insiders. It upsets the
activists but gives the companies more freedom to run their companies
or sit on cash as they see fit.
In Silicon Valley, aggressive
activist moves almost always are considered unwelcome by tech giants
that want to be left alone. But in many cases, the companies need a
shake-up, Elson said.
"The issues the activists raise
were there whether Icahn raised them or not," he said. "Don't blame
Twitter: @russ1mitchell @byandreachang
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