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EBay Enterprise Spinoff, The Icahn Pact And PayPal’s Future

As eBay moves beyond what CEO John Donahoe called “a very difficult year” for the company, the e-commerce giant might be preparing to split off from more than just PayPal.

Soon eBay’s latest footprint in the marketplace could become threefold instead of just two as it was announced in the company’s fourth-quarter earnings report yesterday (Jan. 21) that it is “exploring strategic options for eBay Enterprise, including a sale or IPO.”

“Enterprise is a strong business and a leading partner for large retailers, managing mission critical components of their e-commerce initiatives. However, it has become clear that it has limited synergies with either business and a separation will allow both to focus exclusively on their core markets, as we create two independent world class companies,” the company said in its release.

According to the company’s release, eBay Enterprise’s gross merchandise sales grew 9 percent in the quarter. Revenue grew to $443 million. Enterprise enabled its clients to grow same-store sales 12 percent.

Enterprise continues to expand its omnichannel capabilities, delivering $1 billion in ship from store sales in 2014, and broaden Magento’s reach and global ecosystem. Enterprise supports merchants across the entire customer experience journey — from getting new shoppers into clients’ brick-and-mortar and online stores and inspiring them to buy — to delivering the goods and turning customers into loyal repeat buyers,” eBay wrote.

While the company’s executives didn’t get into much detail about the potential sale or spinoff of eBay’s Enterprise unit, which manages online sales efforts for other businesses, Donahoe mentioned the mix between the Enterprise business, PayPal and eBay Marketplaces doesn’t fit — particularly once the two companies split. The decision to potentially split off its Enterprise side comes at a time when eBay’s Marketplaces is struggling due to what CFO Bob Swan called an increase in the competitiveness in omnichannel and e-commerce markets.

“This is not business as usual,” Swan said, calling it a disappointing quarter and year for eBay Marketplaces. He also warned that ““it’s going to get worse before it gets better.”

“Our ecosystem has been disrupted,” he added. 

Another issue for eBay is that its growth currently hinges on PayPal contributions as eBay Marketplaces only grew 1 percent in Q4 and 6 percent in 2014. PayPal’s revenues increased 18 percent for the quarter and 19 percent for the year. Donahoe wasn’t shy in sharing his disappointment about eBay’s core growth among the Marketplaces side and called 2014 “a year, quite frankly, we’re glad to see come to an end.”

eBay Marketplaces gross merchandise volume grew 2 percent, with the U.S. up 3 percent and 1 percent internationally; revenue grew to $2.3 billion. Marketplaces gained 2.9 million new buyers in the quarter and 14.9 million for the full year, up 11 percent to 155 million.

“Traffic was impacted by both the decline in new users due to SEO changes and the occasional buyer not returning to our site or being met with increased friction due to the password reset when they did come. In addition, the rising dollar negatively impacted export volume in the U.S.,” eBay said.

But with all the moves ahead for eBay and uncertainties about growth, Donahoe said 2015 will be a year of transitions.

“With the planned separation of eBay and PayPal in 2015, we are moving forward with clarity and speed,” Donahoe said. “We’re taking aggressive and decisive decisions to address both the opportunities we see and the challenges we face. …We believe more strongly than ever that separation is the right path for our company.”

EBay also confirmed yesterday the news that was announced in December that eBay was planning on cutting 2,400 jobs — around 7 percent of its workforce — across Marketplaces, PayPal, and eBay Enterprise. Those layoffs will occur in this year’s first quarter.

In news unrelated to earnings, but particularly relevant for the eBay/PayPal split, eBay announced yesterday that it has entered into a “standstill agreement” with investor Carl Icahn, the company’s largest active shareholder. This agreement requires particular governance provisions to be adopted by PayPal once it is an independent company. Perhaps more curious, are the requirements designed to provide shareholders with the ability to weigh in on any offers to acquire the company, including limitations on poison-pill provisions and preventing a staggered board. Icahn, who demanded last year that PayPal split off from eBay, has also arranged for Icahn Capital executive Jonathan Christodoro to join eBay Inc.’s current board of directors. The agreement also allows Icahn to determine which board Christodoro will join when separation occurs.

“This agreement reflects our alignment on separation and our agreements on the benefits of avoiding distraction,” Donahoe said.

Mobile payment and mobile commerce were highlighted as positives for eBay’s fourth quarter results, but mobile also presents challenges for a company like eBay.

“Mobile has become a greater percentage of our mix, which skews more toward emerging markets and a younger demographic who tend to buy lower-priced items,” Donahoe said. He also discussed mobile innovation on both eBay and PayPal.

“For both businesses, mobile continues to be a major source of innovation. … Mobile GMV was up 42 percent for the year. Mobile GMV at eBay was $28 billion. You saw the iPad app that we launched right before Christmas — that is the freshest, most innovative mobile experience that eBay has built in years. And it’s geared toward infrequent users or new users. …Throughout all the challenges the Marketplace has now and all the operational executions they are focused on, we are still focused on the mobile experience — like live auctions and other things. There is no lack of attention for innovation across all our businesses.”

According to what eBay released in its Q4 earnings report, its commerce and payments ecosystems increased its role in the company’s global and mobile commerce share in the market. Mobile payment volume grew 58 percent, year over year, to $45.6 billion; this represented 20 percent of its total commerce volume. Overall, mobile commerce volume grew 30 percent, year over year, to $27.9 billion for 2014, which represented 34 percent of total commerce volume.

As for PayPal’s quarter performance, revenue in Q4 grew to $2.2 billion. Fourth-quarter net income rose 10 percent, which was attributed to the strength of PayPal. The net total payment volume grew 24 percent in the fourth quarter with Merchant Services volume up 33 percent and on-eBay volume up 3 percent. Revenue for PayPal in Q4 grew to $2.2 billion. PayPal gained 4.6 million new active registered accounts in the quarter and 18.9 million for the full year, which is up 13 percent to 162 million. Globally on-eBay, penetration increased to 80.8 percent. In 2014, eBay hit a commerce volume of $255 billion, up 24 from the year prior. Gross merchandise volume hit $83 billion and total payment volume hit $228 billion. Overall, eBay saw a revenue growth of 12 percent.

A brief history of eBay in 2014

The second quarter of 2014 was decidedly a mixed bag for eBay Inc, with PayPal pushing corporate revenue while the e-commerce side of the business lagged.  

“In a challenging second quarter, our commerce and payments platforms delivered strong enabled commerce volume growth of 26 percent,” said eBay President and CEO John Donahoe in a statement.“PayPal generated another strong quarter while eBay’s growth was hampered by its global password reset for all users. We continued our momentum in the four competitive commerce battlegrounds of mobile, local, global and data.”

Donahoe had good reason to tout PayPal’s performance in Q2. The payments company saw its overall revenue rise by 20 percent, with a total payment volume growth up 29 percent, as opposed to 27 percent in Q1. The number of registered users also grew by 4 million, a 15 percent increase that brings PayPal’s active user base to 152 million. On the e-commerce side of the business, however, things were far less encouraging. Sluggish growth tipped off by a breach in May that left some users too concerned about security to ever come back. On the upside, revenue grew 13 percent, a better than expected result, but one that still had CFO revising revenue forecasts for the year down. In another bright spot for the company, enabled commerce was up to $62 billion, with mobile increasing 68 percent and contributing to 20 percent of total volume.

EBay ‘s Q3

The third quarter of 2014 proved to be rather high drama for eBay as it announced that the company’s payment arm, PayPal, would be split off from its parent company and begin life anew after an IPO.

“EBay and PayPal will be sharper and stronger, and more focused and competitive as leading, standalone companies in their respective markets. As independent companies, eBay and PayPal will enjoy added flexibility to pursue new market and partnership opportunities,” eBay Inc CEO John Donahoe noted in a statement on the PayPal blog. “And we are confident following a thorough assessment of the relationships between eBay and PayPal that operating agreements can maintain synergies going forward. Our board and management team believe that putting eBay and PayPal on independent paths in 2015 is best for each business and will create additional value for our shareholders.”

While the looming eBay/PayPal split was what analysts wanted to talk to during Q3’s earnings call, Donahoe was not interested in saying much past noting that there will be substantial one-time costs associated with that separation process. Instead, the story of Q3 was one that became sort of the theme for eBay Inc. during 2014 — PayPal’s strong growth and expansion balanced and pulled along the most sluggish e-commerce side of the operation.

PayPal’s third-quarter earnings were up 20 percent to $1.95 billion, gaining 4.4 million new active registered accounts to end the quarter at 157 million active registered accounts (14 percent growth from last year). Mobile payment was a standout player, growing 72 percent to $12 billion while its net total payment volume grew 29 percent with Merchant Services up 37 percent. Active accounts acquired on mobile were 2.9 million and newly rebranded PayPal Credit grew 29 percent.

Q3 also saw CEO John Donahoe walking back his earlier pessimistic predictions about NFC, which he once said stood for “not for commerce.” Apple’s much-publicized introduction of its NFC-fueled Apple Pay, Donahoe said, has forced him to reassess NFC.

“PayPal has always been sort of technology agnostic around how a consumer wants to pay. For quite a while, we thought NFC was not going to get very fast adoption. Now with the recent industry changes, with localization, I think that will be accelerated. Although it’s important to understand (that) accelerated may be (moving) from a three-to a five-year horizon to a one-to-three-year horizon. This is not something that’s going to happen in months,” the CEO told analysts in a Q3 conference call. “In Australia, there is a fair amount of NFC use and consumer adoption and there are times where they tap their phones, there are other times they tap their cards in an NFC format. So our goal is to have PayPal to be enabled for however our consumer wants to pay and so that’s what we’re doing. And as I said, anything that increases digitization of payments I think expands our addressable market.”

PayPal’s strong quarter gave eBay the needed boost in what was referred to as a “very rough year” for eBay following a loss of the amount of traffic due to Google SEO tweaks and the cyber security breach that caused password reset glitches.

“PayPal had another strong quarter, and its mobile payments leadership and momentum continued with mobile volume up 72 percent to $12 billion. PayPal is on track to process 1 billion mobile transactions in 2014. And eBay continues to focus on enhancing its competitive position, improving the experience for buyers and sellers and investing in consumer engagement. As we prepare to separate eBay and PayPal in 2015, our teams are focused on strong execution to ensure each business is set up for long-term success,” Donahoe said in the earnings analyst call.

2014: EBay and PayPal by the year

While the portrait of 2014 is one where PayPal’s continued rapid growth is pulling along somewhat more sluggish growth in the e-commerce side of the business, there are some indications that eBay’s future as a marketplace may look somewhat more brighter than its present, particularly if digital commerce continues in its present slide toward mobile.

According to research released in late summer 2014, eBay is the most popular retailer on mobile, beating out even much overall larger Amazon. EBay’s mobile reach was 34 percent, while Amazon’s was 28 percent. EBay also took Amazon’s crown as the most popular retail website. Amazon had a unique audience of 24.4 million in March 2013, just ahead of eBay’s 23.4 million. By March 2014, Amazon’s unique audience was 26.9 million while eBay had increased its own to 27.3 million.

So what’s ahead for eBay in 2015? Layoffs and separation. What’s unclear, at least for now, is what impact the PayPal separation and now the potential Enterprise separation will have on eBay’s overall marketplace ecosystem. 

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