eBay Shareholders Missing Icahn’s Key Message

eBay Shareholders

Part of Carl Icahn’s message is getting through to investors, but it might not be the message Icahn wanted to get through.

A new study released by Bernstein research shows that eBay shareholders are divided about whether PayPal should be spun off from the online auctioneer, which is the primary goal behind Icahn’s public display of hostility towards the eBay Inc (NASDAQ:EBAY) board of directors.

While unsure of Carl Icahn‘s primary goal, the message investors may be accepting loud and clear is the composition of the board of directors should be changed.  Unfortunately for Icahn, only a small percentage, less than 30%, thought the activist investor should receive a board seat.

Best reason for a split is unlocking shareholder value

pay pal split reason

In a poll of 178 investors, nearly half of whom were eBay Inc (NASDAQ:EBAY) shareholders, 2/3 were long only and 1/3 were hedge funds, the group overwhelmingly said the best reason for a split would be to unlock shareholder value.

“Over 60% of respondents believe that PayPal’s value is under-recognized as a segment of eBay Inc (NASDAQ:EBAY),” the report noted. Other reasons mentioned by the respondents included PayPal’s ability to hire better as a standalone company, better incentives for management, and more flexibility in operating the company. The report also noted that PayPal would have “conflicts of interest with other eBay marketplace competitors.”

Why keep eBay and PayPal together?

While breaking up PayPal is the topic of the day, investors also considered reasons for keeping the two companies together. PayPal’s ability to use eBay Inc (NASDAQ:EBAY) as a low cost customer acquisition engine was the largest reason against a split, the report noted, followed by PayPal’s ability to use eBay customer data.

pay pal why break it up

Over 45% of respondents cited PayPal’s ability to use eBay Inc (NASDAQ:EBAY) for low cost customer acquisition was most important reason, with 52% of non-owners of the stock viewing this as most more important. Owners of the stock valued the acquisition cost argument less than the big data argument.

How to split the firm: best of both worlds

pay pal how break up

If the firm were to split, the most popular alternative structure to a split off was a partial float of PayPal, selling a minority stake in PayPal to the public. The report noted 46% of respondents (yet 52% of eBay Inc (NASDAQ:EBAY) owners) viewed a partial float of PayPal without splitting up the company (e.g.) as a better outcome than an outright split. Increased stock buyback were viewed as the second best alternative. A few investors also mentioned using tracking stocks as an alternative to actually floating shares. Finally, some investors mentioned simply an improved performance and better synergy realization within the company as the more preferable option to a split.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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