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Changing the guard

22 January 2008 By Jeff Segal

Ebay CEO Meg Whitman could be stepping down in the near future. Wednesday’s earnings call seems like an opportune time to say so. After all, March would mark a decade at the helm for Whitman, and she herself once said that no CEO should ever stay more than ten years in the same job.

She deserves credit for taking a small auction site with fewer than 30 employees and turning it into an internet behemoth with a market capitalisation of $37bn. But recently, shareholders have reason to be impatient with Ebay. Its stock has lost more than one-third of its value over the past two years. Some of this can be attributed to what was arguably Whitman’s poorest decision as CEO, Ebay’s $3.1bn acquisition of Skype in late 2005.

Still, Whitman has left the company’s next leader, likely to be auction unit president John Donahoe, with considerable assets to work with. He’ll have the benefit of being seen as fresh blood. He could also make an early impact by finding better homes for two of Ebay’s big non-auction units Skype and Paypal. That’s because the company is undervalued compared to the sum of its parts. A new boss could unwind that conglomerate discount by collecting the full value of these non-core assets.

Selling Skype is an obvious and necessary move. Ebay has already had to write down its value by $1.4bn, and the internet telephony company should be worth a lot more to other internet players. Two that make sense are social networking giants Facebook and MySpace. The sites many millions of users could be turned into Skype customers, and the Skype service looks like a good fit as an additional networking tool.

The less obvious option is spinning off Paypal. But its highly profitable secure internet payment business, which may generate $600m in earnings before interest, tax, depreciation and amortisation in 2008, could also have greater value outside Ebay. Other online shopping giants like Amazon and Google, who don t use it now, could flock to the service if it were not owned by a perceived competitor. Ebay’s shareholders would cheer if a sale realised at least some of that potential value.

Meg Whitman’s successor should thank her for handing over a company with many attractive assets and a strong core business. But along with a fresh face, what the company arguably needs is a bold move. Spinning off Skype, Paypal or both would fit the bill.


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