Both ways

EBay could have it both ways with PayPal

EBay just might be able to have it both ways. The online merchant thinks owning PayPal is symbiotic. But activist investor Carl Icahn says the online auction and payments businesses would be worth more separated. Storage hardware giant EMC garnered some of the best of both worlds by partially spinning off virtualisation software group VMware. The same approach at eBay could defuse the tension.

PayPal gets about a third of its new customers from eBay, the company says. That figure is still substantial, though falling. EBay also argues that merchant data help mitigate losses from payment fraud, and that its offshore cash can serve as cheap funding for PayPal.
 
Icahn, however, has a point. A Breakingviews analysis suggests eBay's parts would be worth at least 15 per cent more than the company's current market value. Separating PayPal would attract new investors excited by a pure play in the hot area of payments - and more online retailers might use PayPal's services if it weren't tied to eBay. Even eBay admits a separation could eventually make financial sense.

EMC's experience offers a template. The company bought VMware for $635 million in 2004. Like eBay's acquisition of PayPal, the deal has paid off handsomely. VMware is now worth $44 billion. There's a known market value because EMC spun off a chunk of its subsidiary in 2007. With about 80 per cent of the stock, the parent still runs the show. EMC argues that both companies benefit from the combination of hardware and software.

Meanwhile, investors have thrilled to the VMware pure play. EMC's stake in its subsidiary accounts for about two-thirds of its total market capitalisation, while VMware provides just over 20 per cent of combined sales and under a third of profit. The performance of the listed subsidiary since its float has helped drag EMC's shares up about 50 per cent, against an increase of a third in the S&P 500 Index.

Such a structure applied to PayPal could bring similar valuation benefits for eBay. Sure, there would be administrative costs. A partial split might only lessen rather than eliminate the current discount. And, PayPal would still be related to eBay. But floating a chunk of PayPal might keep Icahn at bay and please eBay shareholders - while providing a first step toward a full separation later.