EBay follows Icahn's advice, plans PayPal spinoff in 2015

(Reuters) - EBay Inc plans to spin off its PayPal unit next year, bowing to activist investor Carl Icahn's argument that the move would free the fast-growing payments business to compete more fiercely in the competitive mobile payments market.

The move, announced on Tuesday, is an about-face for eBay's top leadership, including Chief Executive Officer John Donahoe, who publicly resisted Icahn's push earlier this year and led a campaign to convince investors that eBay and PayPal should remain together.

EBay's shares jumped as much as 8.8 percent after the announcement. By mid-afternoon, the stock was up 7.8 percent to $56.79.

Donahoe as well as Chief Financial Officer Bob Swan will step down after the spinoff in the second half of 2015, but were expected to serve on the boards of one or both companies after the split. EBay will spin off PayPal as a publicly traded company in a transaction that will be tax-free to shareholders.

PayPal's next CEO will be Dan Schulman, former head of American Express Co's online and mobile payment business. The new eBay will be headed by Devin Wenig, president of eBay marketplaces and former head of the markets division at Thomson Reuters Corp.

EBay's change of heart reflected mounting activist and shareholder pressure, analysts said. In a statement, Donahoe said "a thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively."

By wresting free of eBay, PayPal can build partnerships with e-commerce rivals and seize market share from payment startups like Stripe, which is backed by several PayPal founders, and technology behemoths like Apple Inc, which unveiled its own mobile payments initiative earlier this month.

PayPal could be acquired again down the line by a technology company trying to expand into mobile payments, such as Apple, investors and analysts said.

"There are those who have not embraced PayPal because they're part of eBay," said Richard Sichel, chief investment officer of The Philadelphia Trust Co, which manages $2 billion and owns eBay shares. "It's more of a pure play then."

'RIGHT GUY AT RIGHT TIME'

The spinoff also helped PayPal attract Shulman to the post.

"I don't think we would have gotten Dan if it weren't for having a CEO opportunity and he is just the right guy at the right time," Donahoe said on a conference call with analysts.

Icahn, eBay's sixth-largest shareholder with a 2.48 percent stake as of June 30, pushed for a spinoff earlier this year but backed off in April. He also withdrew his two nominees to eBay's board.

But in a concession, the company added a 10th independent director, David Dorman, a founding partner of investment firm Centerview Capital Technology.

"We are happy that eBay’s board and management have acted responsibly concerning the separation – perhaps a little later than they should have, but earlier than we expected," Icahn said in a blog post.

Donahoe, in an interview with Reuters, acknowledged that eBay was following Icahn's recommendation, but contended that eBay arrived at its conclusion after six months of study, and was not pressured by the board.

As recently as the beginning of September, Wenig told investors at a conference "the best way to create value is that it is one company," rather than spinning off PayPal. However, he added then that the board was "open and objective" about creating shareholder value.

The move comes as several activist investors step up pressure on other companies to spin off assets as a way to create value. B/E Aerospace Inc and JDS Uniphase Corp are among those that did, while others like Darden Restaurants Inc and EMC Corp are resisting.

"This is clearly not a move executed from a position of strength," Macquarie Capital analyst Ben Schachter said in a research note on eBay's PayPal spinoff.

ACQUISITION TARGETS

The spinoff will separate the payment business, which contributes a little over 40 percent to eBay's revenue, from its marketplaces and enterprise businesses, such as the online auction operation.

EBay said revenue in its marketplaces and enterprise unit increased 10 percent to $9.9 billion in the last four quarters, while PayPal revenue rose 19 percent to $7.2 billion.

EBay had a market value of $65.36 billion as of Monday.

PayPal was founded in the late 1990s and went public in 2002 and was acquired by eBay soon afterward for $1.5 billion.

Goldman Sachs and Allen & Co LLC are eBay's financial advisers and Wachtell, Lipton, Rosen and Katz is its legal counsel.