ALICIA JION CASE STUDY 1

The Five Reasons behind PayPals Split from eBay

1.0 Introduction

PayPal

Before internet booming, send money to people around the world is not an easy task. With
PayPal, sending money is free, quick and easy. PayPal early establishment was in December
1998 as a security software company for handheld devices which was created by Peter Thiel,
Max Levchin, Luke Nosek and Ken Howery. In 1999, it was developed as a money transfer
service by John Malloy to operate and transfer online payment worldwide which offers
secure online transactions. Its service allows anyone to pay in any way they prefer including
through bank accounts and credit cards without disclosing financial information to third
party. It is also an alternative to traditional payment like cash, cheques and money orders.
The way it earns money is the fees they charge to a payments recipient. Even though most
transactions are free, merchants have to pay a fee for each transaction made. The fee costs
about thirty cents plus a 1.9% to 2.9% surcharge fee, all depends on the special surcharge
formula they use. Another way PayPal earns profit is by earning interest against the money in
the account. Any person who owns the account will not be paid for interest.

The advantageous of PayPal are it is instantaneous since it will debit or credit to accounts
once transaction is completed, they have a complaint process to resolve disputes between
sellers and buyers, very convenience and lastly most important, as a buyer, there is no need to
provide account information to every merchant they transact with but only to PayPal.

eBay

eBay is an online auction and shopping website where people and business can buy and sell
various items and services worldwide. Due to the evolving usage of Internet in the economy,
it was founded by Pierre Omidyar at his San Jose living room back in 1995 which he
discovered ways to provide consumer-to-consumer and business-to-consumer sales services
via internet. From a start, it was meant to be marketplace for the sale of goods and services
for individuals. Since the dot-com bubble, e-Commerce has taken the business by storm. It
was originally called AuctionWeb and changed to eBay in 1997. Today with more than 30
countries in operation worldwide, it is a successful multibillion-dollar business. It has become
as one of the recognisable brand in the world and rank consistently at Fortune 500.
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2.0 The split

PayPal was acquired by eBay in 2002 for $1.5 billion. Ten years later the service has total
payment volume exceeding $60 billion. The split that ended a 13 years of cooperation
happened due to several factors. According to the article by Katherine Rushton (2014), there
are five reasons behind the split.

2.1 Apple Pay

It is quite competitive business for online payment but so far PayPal is still steady in the
market. This changes once Apple announced a new strategy to introduce its own online
payment system which is Apple Pay. This is a smart move for Apple as more and more fans
of Apple product are going to use this system to buy items online or pay bills online which
just through smartphones without having to rely on credit card alone. Smartphone is
becoming a tool for consumers in performing their routine every day. The article by
eMarketer (2014) mentioned that it is estimated that there will be 2 billion consumers of
smartphones in 2016. Because of Apples strategy, it has become a threat for eBay because
Apple is a strong competitor. Seitz (2015) reported that Apple iPhone owners are using more
mobile payment applications compared to Android smartphones. Approximately 45% mobile
payment users chose Apple Pay and PayPal came in second with 28% in December 2015.
Apple can be considered as a late comer to the digital payment method market but somehow
it manages to develop the most efficient method. Before Apple begins its development, the
company first struck partnerships with giant brands US credit card companies and huge
merchants namely Macys, Duane Reade, McDonalds and Whole Foods. Apple understand
its customers buying behaviour as compared to Pay Pal. What drives customers to choose
Apple Pay compared to Pay Pal is obviously because of its existing cooperation with
recognised brands. Article by Craig (2016) stated that brand awareness is a crucial factor
contributing to customers buying preferences. Aside from that, Apple Pay understands that
convenience is one of its strong selling points. Apple Pay can be accessed through Apple
Watch and that is another solution to existing customer problem with digital payment
method. Furthermore, Apple Pay has credit card data in iTunes as compared to PayPal as
reported by Statista (2015). With this, eBay hopes to split their operation in order to give
PayPal the focus it needs to stay ahead of this new competitor.
ALICIA JION CASE STUDY 1

2.2 Shareholder pressure

The pressure by shareholder is also one of the strong drives for this split as we all know that
shareholders opinion hold a very important place in any companys strategic decision.
Furthermore, Economist (1995) explained that shareholders can actually voice out their
displeasure towards organizations actions by boycotting the organizations product or
service. This is what actually had happened when Carl Icahn raise some issues that resulted to
the step down of CEO John Donahoe. Carl Icahn is an American entrepreneur and
philanthropist had his touch on the industry for many years. He is very well known for being
one of the causes in eBay and Pay Pal split. Carl Icahn did not see any more future for eBay
and Pay Pal to work together with the emerging competitors in the industry. He is one of the
important figures in the industry as he holds larger amount of shares in companies and
persuade for management change. Icahn took control of the companys board in San Joses to
add more pressure after being resisted by eBay to spinoff Pay Pal. The dispute went off for
another 9 months and finally it did not take long for eBay and Icahn to come into mutual
understanding in April and later add David Dorman into the board. Donahoe released a
statement mentioning that the separation in 2015 is depending on expected conditions
Bloomberg (2015).

2.3 Increased in value overnight

PayPal is also reported to have an increased in value from $1.5 billion to $50 billion today. In
my opinion, PayPal has been around in the industry for quite some time to build its
connection and business worldwide. This can be seen that the company has millions of
registered account from countries all over the world and ties with financial institutions. This
separation from eBay will allow PayPal to have a more focused direction to capitalize the
new opportunity in the market. The split made PayPal to be an independent company in the
industry thus able to play strongly. According to the source from Business Insider, Pay Pal is
reportedly valued at $49.5 billion more than other giant players in the industry like Twitter,
Netflix and eBay. It is believed that by keeping the two companies together does not bring
much benefit to both companies. Due to the dynamic industry and customers demand, PayPal
is able to serve strategically after the split. Unique is definitely the companys selling points
as PayPal is able to serve its focus on digital payments, customer service, innovation and
technology that creates value for consumers and online merchants in applications.
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2.4 Different strategies and priorities

It was argued that both companies are better off separate because of different strategies that
they practice and different set of priorities. PayPal is reportedly making twice the revenues
than eBay with 19% annual growth compared to 10% online marketplace. This will allow
each of the business to focus on what is best for them instead in a large group. Those in the
the know predicted that PayPal would be worth more than $100 billion if it were allowed to
go separately.

2.5 It puts a sale sign above PayPal

The split put a sale sign above PayPal. Based on the case study, this point highlighted that the
split will open for other business to acquire PayPal. Take the example, of Google Wallet
payment. This online payment had made its debut to the market for years but unable to soar
massive success in the market. This is becoming tougher for Google since Apple comes into
the picture. That is why since the split from eBay, PayPal is seen as an opportunity to others
for strategic move.

3.0 PayPal and eBay performance analysis after actual split in July 2015

eBay

Upon the split, the company manage to make an impressive achievement with regards to
revenue and share during the first quarter. However the achievement failed to sustained
overtime. The company reached the revenue of $2.1 billion above the expectation of $2.09
billion mark by other investors (Trusted Reviews, 2015). The company also achieved 43
cents per share higher than the expected 40 cents per share which is reported on the first
quarter of the year since the split.

During the fourth quarter, the revenue was at $ 2.32 billion as forecasted by Wall Street
analyst. Gross merchandise volume (GMV) of goods sold reportedly at $20.7 billion turned
to $1.9 billion in revenues. The active buyers reached a total of 162 million at the end of the
year with 5% growth. In the end, the company fell short of 2% in revenues to %8.6 billion.
Other revenues like transaction made $6.83 billion and marketing %1.76 billion. Overall, in
2015 the company earned $1.83 per share.
ALICIA JION CASE STUDY 1

PayPal

Ever since the split, the company was able to reach $49 billion market value almost with
eBay. The parent company was beaten down in terms of revenue when PayPal scored
revenue of 16% to $2.3 billion for the second quarter. Apart from that, the transaction value
increased by 20% to $ 66 billion. However despite the increased growth in various parts, the
company reportedly fell below forecast in revenue while enjoying a 31% increased in profits.
The downfall was shares fell to 34.67% which is more than 5% after the trading.

4.0 Opinions on whether the five reasons carry their own merits

In my opinion, every business that decides to split after years of marriage is due to achieve
better financial performance. In the very beginning the sole reason for any acquisition
particularly in terms of business is to have stronger and more efficiency in terms of resources
and capabilities in the market. As the case of eBay and PayPal, it foresees the incoming great
competition by giant brands like Apple. Steve Jobs is a visionary leader who is constantly
creative and introduced more applications and functions that completely became a threat for
the online payment industry.

On top of that, pressure by shareholders who holds significant influence and resource in the
industry can also affect other investors perceptions. It is safe to presume that business
politics does have an impact on companys direction. The belief that after separation the
value will rise also fuelled more desire for the company to split. By operating separately, they
can strategize better such as differentiation and focused strategy. For example, Pay Pal
perhaps can introduce user friendly applications that can be made available to giant search
engines.

Another reason is having strategic priorities is necessary because of the intense competition
in the market. Each business wants to appear distinctive and the companies decide to
restructure its management with the hope of creating new and revolutionized directions for
financial growth.

By informing the public of the separation, the companies are actually trying to get the
attention of potential investors. Both PayPal and eBay are aiming for giant companies to
invest on them as previously they did not enjoy the amount of success that they hope with the
ALICIA JION CASE STUDY 1

previous acquisition. The companies are aiming to penetrate into new market which is the
Asian market like Alibaba as there is no other giant players in the industry and that they can
be the dominant player in the market.

5.0 Conclusion

In conclusion, online payment landscape is growing rapidly with new competitors entering
the market. Giant brands like Apple and Amazon both are competing intensely by introducing
new products. Other players are also following suit like Stripe and ShopKeep and are already
a threat to eBay and PayPal. Strategy is very much needed for survival in this competitive
industry and that if an acquisition is no longer relevant for financial performance, therefore it
is wise to split.
ALICIA JION CASE STUDY 1

Reference

1. emarketer http://www.emarketer.com/Article/2-Billion-Consumers-Worldwide-
Smartphones-by-2016/1011694

2. ApplePay http://www.investors.com/news/technology/click/apple-pay-wins-over-
consumers-in-survey/

3.economist
https://www.researchgate.net/profile/Irene_Henriques/publication/247970424_Henriques_I._
P._Sadorsky_1999_The_Relationship_Between_Environmental_Commitment_and_Manager
ial_Perceptions_of_Stakeholder_Importance._Academy_of_Management_Journal/links/55e3
788108ae2fac47212bc6.pdf

4. Statistic iTunes http://www.statista.com/statistics/218493/paypals-total-active-registered-

accounts-from-2010/

5. craig http://smallbusiness.chron.com/effect-brand-awareness-consumer-buying-behavior-
68186.html

6. Bloomberg http://articles.economictimes.indiatimes.com/2014-10-
01/news/54516893_1_paypal-donahoe-biggest-online-marketplace

7. shulman http://news.subscriptioninsider.com/paypals-value-skyrockets-after-split-from-
ebay/

8. Telegraph
http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/digital-
media/11134139/The-five-reasons-behind-PayPals-split-from-eBay.html