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eBay and PayPal spin-off, an analysis

  • Why eBay and PayPal merged?
  • The tale of separation
  • How successful was the spin-off?

 

PayPal is an American organisation. The company was founded in 1998 as ‘Confinity’, originally it was a software security firm that provided services to the handheld devices. In 1999, PayPal was launched as a money transfer service and Confinity was merged with X.com and all other internet services were terminated. The USP of PayPal was networking. The firm launched its website and encouraged the staff to invite their friends and acquaintances to PayPal with an offer to pay $1 for each sign up.

PayPal identified eBay as its user base since at that time there was no standard payment service on eBay. In 2000, eBay launched its own payment service Billpoint to compete with PayPal, but Billpoint was a failure in comparison to PayPal and its network. Additionally, 70% of eBay users accepted PayPal as a mode of payment and only 30% opted for Billpoint. Hence, at the end of the first quarter, PayPal reported a profit and Billpoint reported a loss. Thus, after the initial hiccups, eBay decided to merge with PayPal through its IPO in 2002.

PayPal was also hugely dependent on the user base of eBay, even though eBay had its own competing payment service. This was due to the fact that there were very few successful e-commerce firms back then and eBay provided access to a high number of active user base. For this reason, two-thirds of PayPal users were derived from eBay. Moreover, eBay decided not to compete with PayPal and focus on its main business of online retail auction, which was at that time recovering from the dotcom bubble. There were several internet companies which failed in 2000-02, but large players survived, although with decreased market capitalization. Thereby, both these players survived the crisis and decided to work in tandem.

Subsequent to the acquisition, eBay’s revenue increased by 83% (shown in the above chart) as a trusted payment platform was provided on the website. The number of active users also increased by 43% as well as the listed items on the website saw a jump, this provided more options to the customers. If only PayPal users are considered, then they also increased by 17 million (about 46,000/day). It transacted 629,000 payments per day. The acquisition proved a success for both the companies. On an average PayPal contributed 25% to the total revenue right after the acquisition and 44% of total eBay revenue before the spin-off as can be seen in the below chart. 

Interestingly, if PayPal and eBay was a successful marriage then what led to the divorce? The reason behind the merger of the two entities was survival and this also caused the spin-off. In the present scenario, it would have been difficult for PayPal to survive in association with eBay as these firms were not operating at their full potential. In addition, PayPal has other business plans for diversification in the physical market. The company was facing challenges from other payment firms. The platform for internet payment companies is expanding as new players are entering the growing market segment. Apple launched its payment platform named Apple Pay so that consumers can shop without their cards. Stripe, a start-up gave tough competition to PayPal, especially during 2014. Secondly, a new and stronger player Alibaba launched Alipay with an aim to target the US and the European market. Alibaba was a competitor for both the eBay and PayPal. The two largest competitors in the payment market were Apple Pay and clearXchange. The latter is backed by BOA, Wells Fargo, JP Morgan and few other banks and it breached 250 million customer threshold. Significantly, nearly 70% of the digital payments in the US are made through Apple Pay and the growth is not astonishing as Apple is a renowned and trusted brand name.

Both eBay and PayPal were facing stiff competition but this was in different segments and distinct markets, ironically one was growing at a very high rate and the other virtually saw a stagnant growth.

The e-commerce market is performing exceptionally well and is expected to grow at a CAGR of 19% by 2020. However, eBay’s marketplace business is not growing at a similar pace and is at 6%. Likewise, eBay’s competitors are expanding their businesses with innovative concepts. The firm lost its market share not only to Amazon but to other players in the US and Europe (2012-15). Presently, the number of active users for Alibaba are almost 3.5 times its number in 2011 as seen in the above chart. On the other hand, the number of active users for eBay grew by just 68% in this period. Hence, with the growth of competition several fraud cases were also filed against eBay, this shattered the trust of customers and sellers. Alibaba expanded its business in different nations and added more merchants to its seller list, especially after the public offering. The impact of expansion plans was seen through the revenue of Alibaba as shown in the above chart. eBay’s revenue was higher than that of Alibaba (2011-14), although Alibaba surpassed eBay and currently, its revenue is 41% higher than that of eBay. This displays a dormant and traditional approach adopted by eBay.

PayPal would have lost its market share with the scheme of things. The spin-off normally sounds unpleasant, but eBay–PayPal spin-off did not fall in this category. The eBay segment was more profitable to the company prior to the separation of PayPal as seen from the profitability chart below. Secondly, it was expected that both the firms would be in a more profitable position after the separation. PayPal may get the opportunity to innovate and grow. eBay might get more cash to operate and the money can be invested in company’s main business.

*EBITDA margin for PayPal is not available for 2011 as it was a part of eBay and hence, it was not restated by PayPal

Therefore, subsequent to the spin-off, PayPal is doing well as is evident from the revenue chart above. It acquired few start-up companies; Swift Financials, TIO Networks and Xoom Corporation to enter new markets. In recent months, it also partnered with Chinese firm; Baidu to compete with Alipay. The company also allied with Citi and Chase to expand its platform. On the other hand, there is no exceptional growth in the business of eBay. Further, eBay is facing tough competition from Amazon, Walmart and Alibaba. The firm needs to discover innovative ideas to sustain its market share in the e-commerce industry. eBay did few acquisitions to focus more on the online marketplace rather on the auction business. The company is also trying to capture the cross-border customers by developing distinct tools such as eBaymags, which helps vendors to list their product in different languages. Furthermore, in order to innovate and acquire, cash is needed and this was generated through spin-off and sale of existing businesses.

eBay and PayPal separated at the right time. The spin-off was the need of the hour for the high growth e-commerce business pertaining to extreme competition. PayPal has always believed in innovations and a continued association with eBay would have made this difficult.

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