What's behind the EBay, PayPal separation

In February, EBay Inc. Chief Executive Officer John Donahoe appeared on Bloomberg Television with a message: Billionaire activist investor Carl Icahn is wrong and PayPal is stronger as part of the online marketplace.

Yesterday, just seven months later, Donahoe announced he has decided to split off PayPal as a separate company from EBay -- exactly what Icahn had proposed.

What happened? Donahoe said he didn't exactly change his mind and wasn't pressured by his board to do it. Instead he was playing two games at once -- keeping Icahn at bay while assuring shareholders he was always open to the idea of a breakup. Working with Icahn publicly to split the company at the start of the year would have distracted employees, and it would have been done in a rushed way, he said.

"We've come to a decision that was the same as Carl's," Donahoe said in an interview at Bloomberg headquarters in New York. "We made it on our own time, in our own way."

The battle with Icahn wasn't cheap. It contributed to a nearly $100 million increase in EBay's administrative expenses during the first half of the year, corporate filings show.

Icahn, 78, started the campaign in January, saying he'd been buying shares and was nominating two directors to EBay's board. He called a separation of PayPal from the company a "no- brainer" in an interview on Bloomberg TV.

Donahoe, 54, quickly dismissed the idea, arguing that a unified entity helps fund PayPal's expansion into areas such as mobile.

The fight escalated in February when Icahn accused EBay directors Marc Andreessen and Scott Cook of conflicts of interest, charges that EBay founder and Chairman Pierre Omidyar rejected as false and misleading.

The dispute was settled in April when EBay agreed to add an independent director to its board while Icahn dropped his campaign to add two board members and force a PayPal spinoff.

"I didn't want to create a noisy media cycle in the first quarter," Donahoe said. "I didn't choose a very public, distracting approach. I had to deal with it at the time and dealt with it in a way to try to get it behind us."

By June, though, Donahoe was seriously considering a split, he said. The company had started studying the idea in late 2013, as part of an annual review it has conducted since 2008. The rise in popularity of bitcoin, peer-to-peer payments, and the March release of new standards for payment systems that would expand their use in mobile devices had helped convince him that a separation might be the best course.

Donahoe acknowledged speaking with Daniel Loeb's Third Point LLC and other large investors, including Icahn, about the decision to split. Icahn Associates Corp. owns about 2.5 percent of EBay as of June 30, according to data compiled by Bloomberg. Third Point, a hedge fund that also mounts activist campaigns, owns less than 5 percent of EBay, Donahoe said.

"When we came to the end of it, it was clear Carl was going to be an ongoing shareholder," Donahoe said. "I don't like playing it out in the media but I respected his view and factored it in."

Icahn, the 31st richest man in the world with a net worth of more than $23 billion, according to the Bloomberg Billionaires Index, would never "have settled for only one seat unless he was pretty confident that EBay management was going to at least seriously explore splitting up the companies," said Ken Squire, who runs the 13D Activist Fund, which tracks target companies, and activist website 13D Monitor.

"While Icahn deserves credit for this, so does the board and management. They listened to their stockholders."

In a statement yesterday, Icahn said he was "happy that EBay's board and management have acted responsibly concerning the separation -- perhaps a little later than they should have, but earlier than we expected."

Amid rising competition from new payments technology developed by rivals, EBay probably got a follow-up shove from Loeb when his Third Point amassed a stake, said William Meade, president of Billionaires Portfolio, which tracks activist campaigns.

"I find it hard to believe that they would do a 180 flip flop without someone -- whether it was Dan Loeb -- or they thought 'if we don't take PayPal and spin it off now we're going to lose half its value once Google and Apple get their payments technology together'," Meade said.

As an independent company, PayPal can pursue business with any company that's doing commerce around the world, even if they compete with EBay -- including Alibaba Group Holding Ltd., Donahoe said. Meanwhile, EBay can use its cash on acquisitions that will boost its own growth, something that up until now wouldn't have been justified because the money would have a higher return being invested in PayPal, he said.

Donahoe plans to sit on one or both boards and may be the chairman of one of them, he said. He chose not to be CEO of either PayPal or EBay's marketplaces business because Devin Wenig, currently president of EBay Marketplaces, and Dan Schulman, who is joining PayPal from American Express Co., would do a better job running the separate businesses than he would, he said. EBay worked with Jim Citrin at executive search firm Spencer Stuart Inc. to find Schulman, Donahoe said.

"Carl was creating quite a bit of distraction in the media," Donahoe said. "The way you quiet things down is to put a counterargument out there. My ultimate objective is to keep us growing the business. I think we've moved at the right pace."

To contact the reporters on this story: Alex Sherman in New York at asherman6bloomberg.net; Beth Jinks in New York at bjinks1bloomberg.net To contact the editors responsible for this story: Mohammed Hadi at mhadi1bloomberg.net Larry Reibstein