eBay Inc (NASDAQ:EBAY) stock is almost up 5% following a report stating that the company could spin off its cash cow PayPal payments units as early as next year. The stock is currently trading at $55.89 per share and up about 4.63% for the day.
"EBay has been telling potential recruits for the position of PayPal president that it's considering spinning off the payments business as soon as next year, according to two people briefed on the conversations," according to TheInformation.com.
Reasons for Possible Spin Off
eBay is a massive company with a market capitalization valued at $69.45 Billion and generating annual revenue of about $17.05 Billion. They have a solid business plan that will continue generating high revenue for decades to come. So why would this multi-billion dollar company decide to spin off one of its most lucrative divisions?
Spin-offs offer the opportunity for a division to trade independently of a parent company, and in theory, see value unlocked.
In eBay’s particular case, PayPal is the mobile payment system that customers have to use in order to buy items of eBay. It makes sense if an adverse news event, for example, impacts eBay’s stock, PayPal in theory will not be impacted due to its independence from eBay and pure revenue generation from eBay’s customer transactions.
One potential reason for the split, according to The Economist, is that “companies seeking buyers for parts of their business are not getting good offers from other firms, or from private equity.” Also according to The Economist another incentive of spin-offs is called the “conglomerate discount”- that “stock markets value a diversified group at less than the sum of its parts”.
What it means for investors
Current shareholders of the parent company would receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks. Shareholders may then buy and sell stocks from either company independently potentially making investment in both companies more attractive.
This spin-off will be a good opportunity for new and current investors to invest in a new independent stock that is just focused on payments, and isn’t tied to the failure or success of eBay. As of right now, many could argue that PayPal is the main reason to own EBAY, so it will be interesting to see how two separate companies perform.
Still, PayPal, while it does generate revenue from alternative methods, does get a great deal of business from eBay. The online auction side is a key source of free leads for the payment service, so it will be interesting to see what happens to that model in a split.
Bottom Line
The potential spin-off of PayPal from eBay is exciting news for investors because it could unlock the value in both companies, and allow both to prosper more than they might as a combined entity.
Investors should note, however, that given mixed opinions on earnings estimate revisions as of late, eBay has a Zacks rank of #3 (hold) and has an industry rank in the bottom 42%, so as it stands right now, EBAY isn't looking too favorable. Still, the potential for a PayPal spin-off is up in the air, though now it is leaning more toward the optimistic side, so investors should keep a lookout in the news to see if eBay actually follows through and if PayPal becomes its own company.