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Spinning wheels

30 September 2014 By Robert Cyran

PayPal is compelled to accelerate after eBay’s belated U-turn. The $70 billion online auction company has for years resisted setting free its payments business, most recently digging in its heels against Carl Icahn’s demands to do so. Apple and Alibaba have created more urgency than investors, or Breakingviews, could. EBay squandered a big early advantage, but a spun-off PayPal may have a chance to play catch-up.

Being owned by eBay proved valuable early on for PayPal. The innovative internet flea market provided a steady flow of new customers, cash and logistical support to help it grow. PayPal regularly increased total payments at a 25 percent compound rate.

The warm embrace, however, eventually started to smother. More than 70 percent of PayPal’s payments now come from outside eBay, but the ownership structure prevented close partnerships with the likes of Amazon. At the same time, app developers and customers have grown frustrated with PayPal’s software, customer service and sluggish adaptation to new technology. Departed co-founder Elon Musk warned two years ago that the plan he wrote at the turn of the century was essentially still in place and that if PayPal didn’t act quickly it would be “screwed.”

In addition to giving PayPal strategic freedom, independence should help it financially. The company is expected to earn about $2 billion in EBITDA this year. Valuing the enterprise the same way the market does MasterCard and Visa, it would be worth $30 billion. And PayPal will probably fetch a premium currently restrained by eBay – evidenced by the $5 billion increase in market capitalization following the spinoff news – and thus provide it a valuable currency to buy rivals and attract tech whizzes.

PayPal has ground to make up, though. Apple just unveiled a big push into mobile payments while Alibaba’s initial public offering underscored the breathtaking expansion of its Alipay division in China and beyond. EBay boss John Donahoe, who will soon be out of a job, conceded on Tuesday that the heat on PayPal is increasing. MasterCard reckons 85 percent of global transactions still involve cash. That means PayPal, unshackled, has a fighting chance to get back into the race.

 

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