On September 30th, eBay announced that it will adopt a new business strategy—break up the company by spinning off PayPal.  This comes six months after one of eBay’s investors, Carl Icahn, first suggested this strategic move.  After the breakup is complete, PayPal will be a separate publicly traded company, free to pursue any business strategy it chooses.

Icahn has long been an active investor in many companies, pressuring boards across the country to change different aspects of running a business. This includes: altering business strategy, promoting stock repurchase, and changing board composition.  Earlier this year, Icahn tried to persuade eBay’s Board of Directors to spin off PayPal, believing that the companies will be able to generate more value for shareholders separately.  Icahn aggressively pushed for this strategy, utilizing proxy contests to campaign for a PayPal spin off, and even going so far as to nominate new members for election to the board.  Although eBay initially resisted Icahn’s ideas for the company, eventually, the future paths for both eBay and PayPal became clear.

Sometime next year, PayPal will become a standalone, publicly traded company.  Separate boards will be created for the new companies to avoid any conflicts of interest.  While the two companies will maintain close business ties, this move will allow the companies to pursue separate strategies that will benefit each segment.  PayPal’s space within the e-commerce industry has been threatened by increasing competition, including Apple’s new Apple Pay technology.  As new technology continues to evolve, PayPal will need to stay ahead of its competitors. The eBay board believes PayPal will become more competitive as a separate company.

There are also risks associated with a spin off of this large of a portion of the company.  By breaking into two companies, both eBay and PayPal may be more susceptible to takeover attempts.  Operating separately will allow potential buyers to more easily acquire the companies.  The separate entities will need to decide if takeover defenses need to be put in place to protect the now more vulnerable companies.

Increasing competition within technological fields has forced eBay to rethink its corporate strategy and reconsider Icahn’s proposal.  While activist shareholders may not be well received by management at most companies, sometimes an outside perspective may help guide management to correct path for the company.  Although many questions remain concerning the future of the independent companies, each board will be able to better guide the separate entities through whatever challenges may be ahead.

 

Andrea Scheder

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