Equity research firm Stifel published a research report on eBay Inc (NASDAQ:EBAY) on Friday, May 16th. In the report, Stifel analyst Jordan A. Rohan and colleagues suggest that the rumor of a mega-merger between Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) and eBay is not to be too quickly dismissed. Rohan et al, however, emphasize that they know of no ongoing negotiations between the two companies.
Internet sector mega-merger is possible
According to the Stifel report, the Google-eBay deal is not just pie-in-the-sky and “does have real merit.” Rohan et al highlight slippage in Paypal growth expectations and a “material deceleration in growth in the marketplace division as structural issues facing eBay management.
They goes on to suggest that lowered future expectations for eBay Inc (NASDAQ:EBAY) could be a catalyst for the sale of the company and that Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) is now structured for a mega-deal. “Any additional reduction in expectations could mitigate eBay’s appeal to some buyers. We believe eBay management is aware of this challenge and may look for a graceful, shareholder-friendly exit. Google’s issuance of non-voting GOOG Class C shares make the potential for a merger higher than in prior years, as the Google founders would not face dilution in voting control through a mega-deal.”
Finally, Rohan and colleagues also mention the growing possibility of Alibaba eventually claiming a chunk of eBay’s share of the online marketplace may also “translate into an increased willingness by eBay executives to consider a transaction at this point in time.”
Valuing a possible deal between Google and eBay
Valuing this kind of a major deal is no easy task, but the Stifel analysts back of the envelop calculations suggest a price north of $85 billion.
Given that eBay Inc (NASDAQ:EBAY) shares currently trade around 9.6 times 2015 EBITDA, if eBay were pegged at $66 per share in a buy out, as per Stifel’s current sum-of-parts analysis, that would mean an overall 2015 EBITDA multiple of 12.5X. This multiple is well within the reach of Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL), as it is roughly ballpark with Google’s overall multiple after taking cost synergies into account. Google is trading at around 11.0X 2015 EBITDA today.