Wed Oct 01 2014
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Icahn Wins Again: EBay To Spin Off PayPal

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Carl Icahn wins again. The resisters at eBay surrendered to the famed corporate raider’s demands, and the company will spin off PayPal next year.

Is it a good move? I think so. In fact, I think this is a classic illustration of a corporation’s parts being greater than the whole. Stock investors should hope other companies follow Icahn’s advice.


Carl Icahn launched an assault on eBay back in January. I said at the time he had orchestrated events like a financial maestro. At 78 years old, Icahn still manages to play Twitter like flute.

A month later, his fight to unlock value for eBay shareholders had degenerated into sheer embarrassment and mudslinging attacks. By April, however, Icahn and eBay CEO John Donahoeagreed to smoke the peace pipe.

Both sides then went radio-silent … until today.


Icahn thought PayPal would be more valuable if eBay made it a separate company. After all, numerous organizations that could have used PayPal’s payment-processing services viewed eBay as a competitor.

That’s why Amazon (AMZN) and Google (GOOGL) launched their own payment products.

The key to success in today’s economy is focus. The best businesses do one thing, and they do it better than anyone else can. Then they outsource all their non-core functions to specialized companies that do those functions better.

Everybody wins.

You can see this in retailing. Back in the 1960s and 1970s, people shopped in department stores. We all loved the convenience of buying their neckties, yard tools and electric appliances all in one place.

Americans don’t do this anymore. Thanks to the Internet, we all know where to buy the best-quality neckties, yard tools and appliances at the lowest prices. Department stores like Sears (SHLD) and J.C. Penney (JCP) are going out of business.

Icahn saw eBay had a valuable asset in PayPal and wanted to unlock it. EBay’s Donahoe resisted as long as he could. Now he’s giving in.


EBay announced early this morning that it was reversing course. Here’s how Bloomberg delivered the news.

EBay Inc. is spinning off its PayPal division, heeding demands by activist shareholder Carl Icahn and giving the business independence it can use to contend with rising competition from Apple Inc. and Google Inc.

EBay and PayPal will become independent companies in 2015, subject to customary conditions, the San Jose, California-based company said in a statement today. Chief Executive Officer John Donahoe, who said in March a full separation was “not a good idea,“ won’t have an executive role in the businesses.

Mr. Donahoe apparently saw the light sometime between his March statement and now. Now he thinks spinning off PayPal is a fantastic idea. The company even released an 18-page, chart-filled slideshow to explain why.


We may never know what happened behind the scenes at eBay. I think Icahn still isn’t finished. Hereleased a statement today in which he supported eBay’s action, but went on to say that the payments industry “must be consolidated.“

Icahn specifically mentioned Apple Pay and other “strong competition.“ Icahn is still, as far as we know, a major Apple (AAPL) shareholder. He spent months trying to convince Tim Cook to make better use of Apple’s huge cash hoard.

Is Icahn trying to arrange an Apple-PayPal combination? It could make a lot of sense on both sides.This Bloomberg analysis says Google and Alibaba (BABA) are potential buyers, too.

EBay is in no hurry to complete the PayPal spin-off. The slideshow says they expect final approval in the second half of 2015. That’s plenty of time for other suitors to suggest different plans.


I’ve been bullish on eBay for almost a year. I formally recommended the stock in my Oct. 17, 2013, afternoon edition. We’re now tracking that idea in my new Cash Flow Kings service. Today it picked up 7.5% as EBAY shares roared higher.

Carl Icahn is a multibillionaire because he chooses his investments with great care, and then waits patiently while his plan comes together. He’s also very good at nudging the right people at the right time with his Twitter comments and website.

This is what I do (in a much-smaller way) in Cash Flow Kings. I use our Alpha Scorecard cash flow valuation model to identify undervalued stocks like eBay. Right now, for instance, the model says eBay shares are worth almost $ 68. That’s a 20% premium to today’s $ 56.63 close, and doesn’t account for the value of a separated PayPal.

If you like this approach, I hope you’ll try Cash Flow Kings. Click here for a special introductory offer.


The Hong Kong protests I mentioned yesterday haven’t diminished. If anything, they’re growing larger as more residents express their displeasure with what they see as Beijing-driven infringement on their liberty.

Here is a note from a reader living in Hong Kong.

Reader Tim D. says: “We have lived in Hong Kong for three years. First, the objections to Beijing‘s appointments are not recent. They have been going on for a long time.

Secondly neither side can afford to back down. If Hong Kong loses the argument, the next local leader will be one more who is less than what the people want. If you think that the Chinese people want to be governed the way they are, you have not been there.

“If China loses, then a whole lot of other states will want to have their own say. Besides Tibet, other areas joined the mainland as recently as 1959.“

Brad: Thanks for writing, Tim. It does sound like any compromise will be hard. People in Tibet, Macau and other places will inevitably hear about any concessions granted to Hong Kong and then demand the same.

The New York Times has an interesting story today about Hong Kong’s scrupulously polite and orderly protestors. The story makes them sound peaceful but determined. I think this could drag on for some time.

Asian financial markets are playing close attention, too. Hong Kong is the region’s financial center, and global capital could flee quickly if the government clamps down.


As always, I welcome reader feedback on my afternoon thoughts or any other topics. If you have thoughts on eBay, Carl Icahn or Hong Kong, you can leave a comment on our website or click here to send me an e-mail.


U.S. stocks ended the third quarter with a mildly negative day. Here are some headlines I noticed…

  • The benchmarks seemed indecisive today. The Dow, S&P 500 and Nasdaq gauges all started weak, gained strength in late morning, and then faded in the afternoon.
  • Fears are growing that Russia will impose capital controls on Western-owned assets. The nation’s central bank downplayed the idea today — but could always change its mind.
  • Commodity prices fell hard, led by crude oil’s 3.6% drop. Gold slipped to its lowest point since January while natural gas, corn and most other natural resources also lost ground.
  • The U.S. Dollar Index was on track to post its strongest quarterly gain since 2008. That’s bad news for all kinds of commodities. Goldman Sachs (GS) expects gold bullion to touch $ 1,050by year-end.
  • Microsoft (MSFT) previewed Windows 10 for tech media today. We don’t know what happened to Windows 9. Apparently, they plan to skip right over that number.
  • Whatever they call it, we’ll be glad to have the Start Menu back.

Good luck and happy investing,

Brad Hoppmann
Uncommon Wisdom Daily


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