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Why eBay Inc (EBAY) Won’t Spin-off PayPal as of Now?

eBay Inc (NASDAQ:EBAY) has always had the pressure from shareholders of spinning off its payment transfer business, PayPal. The pressure got intensified this year when it had to fight a proxy-war with Billionaire investor Carl Icahn, who is also eBay Inc (NASDAQ:EBAY)’s largest shareholder. Icahn was adamant on eBay Inc (NASDAQ:EBAY) spinning-off PayPal to unlock the latter’s value. Puneet Sikka from Market Realist recently wrote a piece explaining why eBay Inc (NASDAQ:EBAY) thinks that spinning-off is not such a great idea.

eBay Inc (NASDAQ:EBAY)

The primary reason for eBay Inc (NASDAQ:EBAY) not spinning off PayPal is, the payment service provider actually acquires eBay Inc (NASDAQ:EBAY)’s customers at negligible cost and also derives 50% of its mobile volume from eBay Inc (NASDAQ:EBAY)’s customers. The second reason that Sikka enumerates is that the company drives PayPal’s growth by providing it with cheap capital. He argues that if PayPal would work as an independent entity, it would be very hard for the firm to get access to capital at rates that eBay provides.

Sikka also elaborated on what eBay Inc (NASDAQ:EBAY)’s shareholders must expect from the company for the financial year 2014. He acknowledges that though the company’s shareholders agree that PayPal should function as an entity under eBay Inc (NASDAQ:EBAY)’s umbrella, eBay should be ‘ open-minded about alternatives’. Apart from that the company’s shareholders want the company to be aggressive with its $5 billion share buyback program announced earlier this year. Accounting for the $1.7 billion that the company spent in second-quarter of 2014, eBay has spent $3.5 billion in share buybacks in the first half of the year.

As of December 31, 2013, eBay Inc (NASDAQ:EBAY) had $13.1 billion in cash and cash equivalent reserves, which got reduced to $11.6 billion by June 30, 2014, owing to the share buybacks. Sikka points out that the company has still enough cash to fulfill its share buyback commitment for the year.

Disclosure: None

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