It appears no one is safe from Carl Icahn, not even Silicon Valley.

The infamous activist investor is at it again, and this time eBay is the object of his disaffection.  In what has become a very public battle over recent weeks, Icahn has described eBay’s Chief Executive, John Donahoe, as “incompetent or negligent” and director, Marc Andreessen, as “clueless about corporate governance”.

Looking beyond the cheap shots, his argument may have some teeth. The tension stems from eBay’s handling of its 2009 sale of Skype to a group of investors, which included Andreessen’s venture capital firm, for $1.9 billion. Just eighteen months later, that same group of investors sold Skype to Microsoft for $8.5 billion, which, by Icahn’s estimate, cost eBay’s stockholders $4 billion. In its defense, eBay urges investors to recall the tough economic climate in which the sale occurred and maintains it was the product of an active bidding process, from which Mr. Andreessen recused himself.

Why all the commotion over spilt milk? Icahn contends similar incestuous relationships taint eBay’s handling of subsidiary PayPal. “There’s no question that the people in Silicon Valley are going to band together. You know, they’re a band of brothers, and they’re going to band together and say, ‘Well, Icahn’s a bad guy for coming in here.'” Scott Cook, another eBay director, is the founder of Intuit, a direct competitor of PayPal. Leveraging a 2.2% stake in the company, Icahn is pushing for a spin off of PayPal. He cites it as a bad fit and maintains it is worth more as a standalone entity than combined with eBay, therefore a spin-off would create more value for stockholders. Icahn is calling for two seats on the eBay board and has nominated two Icahn Enterprises executives, Jonathan Christodoro and Daniel Ninivaggi, to champion his position.

Vocal support from ally Elon Musk, PayPal co-founder and Silicon Valley heavyweight, lends significant credence to Icahn’s position. “It doesn’t make sense that a global payment system is a subsidiary of an auction website,” Mr. Musk told Forbes magazine. “It’s as if Target owned Visa or something. […] It will either wither or be spun out [… ] Carl Icahn can see it, and he’s not exactly super tech-savvy.” David Sacks, former PayPal COO, agrees. They foresee PayPal, if left unrestrained by eBay’s control, evolving into a massive online bank. Of course, this business model would be subject to stringent regulation, which eBay wants no part of. Sacks and Musk estimate that PayPal could eventually be worth as much as $100 billion as a standalone entity; eBay has a $70 billion market capitalization, of which it is speculated PayPal accounts for $40 billion.

eBay admits it has considered spinning off PayPal in the past, but decided shareholders are best served by keeping the two companies together. Their argument is simple: a payment processing company requires transactions to be profitable and eBay’s commerce platform creates a massive supply of transactions. “EBay and PayPal would compete better, grow faster, and deliver greater value to stockholders together than they would apart,”. They deem the two nominated directors unqualified as neither have relevant experience or expertise and urge shareholders to vote against Icahn’s proposal at the (yet to be scheduled) annual meeting.

It should be interesting to watch this proxy battle to play out in the coming weeks and months. eBay may feel emboldened by Apple’s recent successful defense of an attack by Icahn. By the same token, Icahn had been riding a hot hand until late and is likely bent on removing the sour taste from his mouth. As always, the shareholders’ vote will dictate the outcome.

Kevin Saunders

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