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Sell it now

17 March 2010 By Robert Cyran

Should eBay change its name to PayPal? The Internet group s auctions business is a mature cash cow. Yet its online payments business is growing fast, and is worth almost half of the company s market value. Plans announced today to double its Asian staff by the end of the year accentuate the point. A better idea than changing the stationery, however, is spinning off PayPal.

Independence would focus favorable attention on this gem. Most of eBay s analysts cover online retailers like Amazon, rather than financial firms like Visa. This can lead to institutionalized misunderstanding of a business. Before the financial crisis, those covering General Electric, for example, concentrated on the conglomerate s industrial side and missed big risks in the group s financial arm.

EBay has the opposite problem overlooked opportunity. The company estimates PayPal will generate up to $1 billion of operating profit next year. Put this on the same multiple as Visa, and its value is over $12 billion. It might even be worth more since PayPal s profit is growing over 50 percent faster.

Moreover, the online payments platform is becoming the standard in an industry where winners gain most of the spoils – yet the company has less than a tenth of the $600 billion market for online transactions.

A spin-off has other benefits. Its link with eBay gave the company rich soil for growth. PayPal s penetration in eBay sales has increased both here and overseas, and now reaches around 80 percent in the United States. Success means PayPal increasingly has to look outside its protected garden for growth.

This would be easier if PayPal were independent, rather than attached to a retail business that many potential customers regard as a competitor.

True, eBay might be reluctant to give up its growth engine. Yet its other businesses should generate around $2 billion of operating profit this year. Put this on a conservative 25 percent discount to peers, and it s worth $23 billion according to research from FBR.

Throw in its minority Skype stake – which may be worth $1.65 billion – and eBay s assets are worth $37 billion, or a premium of more than 20 percent to its current value. It s time for PayPal to prepare to leave the nest.


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