eBay Inc (EBAY), Pfizer Inc. (PFE): Does a PayPal Spinoff Make Sense?

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An example of a recent successful spin-off is when drug giant Pfizer Inc. (NYSE:PFE) spun off animal health business Zoetis. Pfizer Inc. (NYSE:PFE) is such a big company, with about $60 billion in revenue in 2012, that having a small fast-growing business like Zoetis within it didn’t have any effect on Pfizer Inc. (NYSE:PFE)’s results. With Pfizer trading with a P/E ratio in the low-to-mid single-digits, it made sense to separate Zoetis from the company.

Today, Zoetis trades at 36 times earnings now that it’s no longer buried inside of Pfizer Inc. (NYSE:PFE), and the spin-off essentially created a $15 billion company without any noticeable effect to Pfizer Inc. (NYSE:PFE)’s fundamentals. This type of situation is an ideal spinoff.

Pfizer Inc. (NYSE:PFE) was able to use the proceeds of the spin-off to fund a massive share buyback program, creating significant value for shareholders. It was a smart move for Pfizer to focus on its core business and shed its animal health business, and shareholders benefited from that decision.

PayPal, however, is not like Zoetis. eBay is transforming from an e-commerce company into a payment processing company, and I doubt that we’ll see a spin-off in the foreseeable future. With eBay at its current levels, there’s just no benefit for shareholders.

The bottom line

eBay has two distinct businesses, but with the stock trading at lofty valuations, there seems to be no reason for a PayPal spinoff. If the stock ever reaches the types of levels seen a few years ago, then a PayPal spinoff might make sense, but I don’t think we’ll be seeing one any time soon.

The article Does a PayPal Spinoff Make Sense? originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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