eBay reaffirms PayPal’s favorite child status by gifting the unit $5 billion in cash as a spinoff looms


Favorite Child

You’re never supposed to reveal which of your children are your favorite. It an unwritten but unwavering rule of parenting. And yet, that’s ostensibly what eBay’s board of directors and senior executives have been doing for months in the wake of the news that it will spinoff PayPal from its remaining marketplaces business.

The latest entry in eBay Inc.’s favorite-playing game is the news, announced by eBay CFO Bob Swan at the Goldman Sachs private Internet conference yesterday, that the company will send PayPal off with a $ 5 billion cash dowry (you know for pizza and beer with its new friends in the dorm). The Marketplaces unit will be left with what remains between the couch cushions, which today would be the balance of the $ 6.3 billion cash and cash equivalents it held at the end of its 2014 financial year.

The cash stockpile will “more likely than not” be housed offshore, according to Swan, but it will afford PayPal far more flexibility than its soon-to-be less well-capitalized Marketplaces counterpart. With PayPal expected to be the target of acquisition efforts by many of the world’s largest corporations, there is also the possibility that a standalone PayPal could buy back shares in preparation for such an outcome. Alternatively, the company could use the cash make acquisitions, invest in new product development, or, least imaginatively, issue a shareholder dividend.

It’s been no secret that PayPal is the crown jewel among the respective eBay business units, which includes both Marketplaces and Enterprise (the smallest unit, which will also spin off). The division has been the primary growth driver for the overall company for several years. PayPal more than tripled Marketplaces’ growth in 2014, producing 19 percent revenue growth for the year. Furthermore, payments is a more highly valued and strategic position to own in the next era of online and mobile commerce. Swan described the future Marketplaces unit as one that will emerge “smaller” and “more-focused” version of the eBay we know today, and one that will focus on customers looking for “great deals.”

It’s not just the division of cash that demonstrates PayPal’s favored status. Current eBay Chairman and CEO John Donahoe has been making plans to leave the eBay board, post-split. He will be handsomely compensated for stepping aside, thanks to a $ 23 million golden parachute. But Donahoe doesn’t appear eager to go too far. Sources close to the company report that he hopes to join the board of the newly-independent PayPal when all’s said and done. Donahoe has already replaced himself as the chief executive for both the surviving eBay Marketplaces business and PayPal, installing former eBay Marketplaces President Devin Wenig and American Express executive Dan Schulman into the respective roles.

As in most business scenarios, if you want to understand someone’s true motivations and priorities, when it comes to eBay and PayPal you can follow the money. The fact that the senior most executive and board chairman is voting with his feet only strengthens the argument.

PayPal’s own long-departed founders, Peter Thiel, Elon Musk, and Max Levchin, have all publicly criticized eBay’s stewardship of the online payments pioneer, while heralding the tremendous opportunity that lays ahead in the still wide open category. The questions Wall Street and Silicon Valley will be asking come spinoff time is, can a newly-independent PayPal claim its innovative ways? It’s certainly the most interesting of the three eBay businesses, a fact that the company itself has made perfectly clear.