eBay & PayPal
I have been quite the avid user of PayPal for a long, long, time. Well before it went public, before the war with eBay, when Peter Thiel thought he was changing the way the masses escaped national currency devaluations and thought he was on his way to a $100 Billion market cap in the process, all while saving the world from greedy and corrupt politicians. Politicians, Dictators, you name it; they would turn on the presses until there was trillions of extra currency in the system chasing the same amount of goods, leading to hyper-inflation.
Money people had earned working hard jobs only to put in a bank thinking it to be safely stored away in a savings account. A savings account that offered double digit rates of return is not really a savings account; it’s really the bank paying you a little less than what it pays to borrow from the central bank. And since there’s runaway inflation in this Banana Republic, the currency devalues by the minute, rates go up by 100 basis points every week, or so it seems. Then one day, the government imposes a limit on daily withdrawals and daily limits on the buying of US Dollars. This is followed by a total limit, riots in the streets, long lines at banks because there’s a bank run with nowhere for people to run. The head of the Banana Republic goes on national Television and says “we are creating the Super Peso, where every 1000 Peso note is now worth 100,000 Pesos and we have to do this to stay competitive with our corrupt and cheating neighbors dumping coffee or cocoa onto the markets below prices or above quotas agreed to at a prior meeting of the XYZ of Exporting Nations.” Sound like anywhere familiar recently? Here’s a clue: Country’s in South America
So, the people are instantly 100 times poorer than they were before the bait and switch. One generation has lost its savings while another generation starts building there’s, not realizing in about 40 years, the same will happen to them. Anyone who studied Economics or Geo-Politics knew this was the game so Peter Thiel founded PayPal to allow for a seamless and highly genius way for citizens of the world to avoid this sort of thing. But the big boys couldn’t have this. The “Group of Paris” lenders, the IMF, the World Bank, they would then lose their control over those countries if people were able to pull money out just like that and convert to Dollars or Euros at the push of a button, to be held at PayPal, for them to use as they wished. Enter eBay and their desire/mandate to keep control of how their buyers and sellers transacted. In an odd way, PayPal’s biggest fortune, was in-fact its undoing. Once eBay had the company in its scopes, Thiel’s vision was dead in its tracks. Now it was survival of the fittest. The world would have to wait.
Being the primary source for settling transactions on eBay was never the real goal for PayPal, or even an idea at first. When it started it seemed to be a viral phenomenon as things happen on the internet. But that pissed eBay management off because they were losing an important part of the buyer/seller experience (and revenue per transaction) to the control of an upstart. But when Elon Musk (the founder of Tesla Motors) came into the picture, he realized they couldn’t fight eBay to the death because they would lose so they went into negotiations. After the PayPal/eBay wars, both companies were tired, PayPal was hanging by a thread, and Whitman thought she hurt PayPal enough to bring the price tag down from $24 Billion (which is close to what Thiel would have parted for it without a war), to around $4.7 Billion, for which she spent about $5 Billion to do so by building their own little internal PayPal copy cat and sucking a huge source of revenue away from PayPal. Whitman and gang were still ahead by about $13 Billion. So she won and eBay bought PayPal for a song. It’s the buy or build strategy, but if you’re going to buy, beat on your target for a while, make them bloody and bruised, desperate for a lifeline, then throw them one, because they’ve lost the will to fight. And you’ve dropped about 80% of their enterprise value by making the analysts think you’re not going to stop until you’ve put them out of business.
They settled and Meg Whitman got PayPal, for what was thought at the time, a bargain $4.7 Billion. There’s no question that they’re (eBay Management) cleaning up and putting as much on circa Whitman as possible, and I think PayPal is one of them. PayPal is a cash cow for eBay. So much so in fact that it generates a huge percentage of eBay’s numbers, and it’s growing asymmetrically, in other words, PayPal is growing outside of eBay’s grasp in terms of revenue. When one of your affiliates or subsidiaries is making a lot more money than the parent company, there’s a big problem. There are large shareholders pushing for a spin-off of PayPal, so the free market could place its’ own valuation on PayPal, like 3com spinning off PALM. But will they? And if they do, what will the spin-off look like? Will they sell it as one piece to another conglomerate like Visa or Mastercard? Or will they distribute it to shareholders, or perhaps a secondary offering? Since they’ve recently started working with the new GE Capital, perhaps GE might buy PayPal in one big transaction? Well, let’s take taxes into account.
The spin-off would probably take the form of a tax free share distribution, with eBay keeping about 20%, or it’ll be a total divesture, fully taxable, with eBay not keeping a single share and conducting a 100% secondary offering (but I can’t imagine them taking this route for several reasons, the biggest being the tax hit). Either way, after dumping PayPal, eBay’s goal may be starting another war with PayPal. Here’s why I think that. Ever since Whitman left, I had a hunch they would divest of PayPal, because there’s just too much incest there and a great deal of potential users might be using alternative auction sites because they hate eBay. eBay merchants are “enticed” to use PayPal. Plus, the cash eBay might be able to generate with a divesture could help it go on either a shopping spree, or make one enormous game changing acquisition. If you haven’t seen eBay stock in the past year, it’s been volatile, but hasn’t really appreciated. But if eBay has any plans of launching another in-house payment system after the PayPal divesture, the best thing for them to be doing right now, is really pissing off both merchants and buyers that use PayPal.
Any user of PayPal is going to experience a horrible, hyper-tension causing interaction with PayPal customer service very soon. Slowly, the PayPal brand will degrade for buyers using them to pay for internet shopping, but the merchants are still bound to it, so that’s the engine that keeps it going for the divesture. Meg Whitman paid $4.7 Billion at the top of the bubble. PayPal has grown immensely since the acquisition, but it never fulfilled its goal of becoming the solution for the masses to avoid controlled devaluations, especially after eBay. Maybe post eBay, Peter Thiele’s original vision will take shape. But my bet is on a write down of goodwill on the divesture, because they can due to the tremendous decline in US equities. The last thing they need is a taxable event on a stock distribution. So I think somewhere around $3 Billion. It’s worth probably $6 to $8 Billion right now with a lot of room to grow without the eBay shackles. Imagine Google using PayPal instead of Google Checkout (which is dying a slow and painful death), or Amazon allowing members to pay with PayPal. As a hostage of eBay, none of these game changers are possible for the company. eBay wanted PayPal to be an internal technology, but it quite happen that way, thanks to Whitman’s handling of the matter.
Try to get some customer service from PayPal now if you had gotten it before, around say a year ago. Entirely different experience. Then cancelling their “Plug-In”, which I thought was their coolest idea yet, and giving away these free credit card size random key generators as a way to improve fraud, is just plain smoke and mirrors. Because the fraud, if and when it takes place at all, takes place at the merchant’s end because they’re the one with your PayPal email address and can claim they have an online merchant agreement with you, thus charging you arbitrarily whatever they wanted, and putting the impetus on you to fight for your money back. Even the credit card size, fancy auto key generator can’t prevent that. So they’re realizing, they’ve got a security mess on their hands, and a great deal of organized crime might be laundering money through PayPal, “The Fastest Way to Launder Your Money”. How’s that for a motto? Watch for the divesture soon, like in the next 4 to 12 months. And when it’s announced, I’ll bet eBay stock drops about $15 Billion in market cap.
Disclosures: NONE
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