In 2015, under pressure from legendary activist investor Carl Icahn, eBay(EBAY) chose to spin off PayPal(PYPL). While PayPal stock has performed remarkably since the spin-off, eBay stock’s performance has been decidedly prosaic. With this backdrop, not one, but two activist investors have entered the stage and begun pushing for changes. Of course, most relevant to us is that they have suggested one or more spin-offs as a possible direction. By the way, these are not your run of the mill activists. They are the most prolific, the most activist of activists, with track records of successful campaigns that litter our pages. Who else could we be discussing but Elliott Management and Starboard Value?
A potential spin-off of StubHub has been discussed for years. See, for example, this 2015 article mentioning the idea, when the ink was barely dry on the PayPal spinoff. With Starboard and Elliott involved, the likelihood of this happening has risen dramatically. Elliott came out swinging last week, issuing a press release which contained a letter it sent to eBay management. Elliott began by saying it owned more than 4% of eBay stock, and that it believed that the plan it was proposing could lead to a 75% to 100% increase in the price of eBay stock.
Elliott’s main point is that while the company’s core marketplace business, its StubHub tickets business and its Classifieds business are all growing, the value of the two non-core business unit’s is not reflected in the eBay stock price. As well, the company’s diffuse focus has lead to “misexecution” and therefore it suffers from a “deeply depressed valuation”. The press release highlights the five points in Elliott’s plan:
I. A Comprehensive Portfolio Review: StubHub and eBay’s portfolio of Classifieds properties represent high-value, strategic assets that are worth meaningfully more than the value currently being ascribed to them as part of eBay. In addition to unlocking substantial value, separating from these assets would allow eBay’s management team to refocus its efforts on the core Marketplace business.
II. Revitalizing Marketplace: eBay’s Marketplace is a strategically valuable asset that has weathered prolonged, self-inflicted misexecution. Management should turn its singular attention to growing and strengthening Marketplace.
III. Operational Improvements and Margin Expansion: Today eBay suffers from an inefficient organizational structure, wasteful spend and a misallocation of resources. By increasing operational efficiency, eBay can free up capital to invest in capability- and revenue-enhancing activities.
IV. Appropriate Capital Allocation: eBay is a mature and highly profitable business that should continue to return substantial capital to shareholders, especially given the significant earnings growth contemplated under the Plan.
V. Effective Leadership and Oversight: eBay must ensure that it has the right, most experienced talent in place to oversee the portfolio review and operational improvements. Management buy-in and Board oversight of the Plan will be paramount to its success.
In the letter, which can be found on the enhancingebay.com site that Elliott has set up, the company describes the intensive research it has conducted in designing its plan.
We have enlisted consultants, investment bankers, accountants, lawyers and former executives to analyze the e-commerce landscape as well as eBay and its component businesses. For the core Marketplace, this included surveys of more than 10,000 buyers and 700 sellers across the U.S., U.K. and Germany. Similarly, for StubHub we surveyed more than 1,250 buyers and 400 resellers of tickets, and for the Classifieds portfolio we surveyed roughly 6,500 users across Germany, the Netherlands, the U.K., Canada and Australia. We supplemented our diligence by consulting with a collection of experienced technology and retail leaders, including more than 100 former eBay employees and e-commerce executives.
In arguing for the separation of StubHub and Classifieds, Elliott points out that the value of a spinoff is more than economic, as we have often seen on our spinoff journey.
The potential value of these divestitures is significant, as has been widely speculated. However, the value is far greater than just financial. These separations would enable eBay and its management team to focus exclusively on improving the Company’s execution in Marketplace. Rather than having to decide where to allocate resources – both capital and mindshare – eBay would be free to devote the entirety of its attention to Marketplace, while a separate Classifieds Group and StubHub would be run in a manner best aligned with their outlook and investment needs.
While it has not come out publicly, the Wall Street Journal reports that Starboard Value has acquired a similar stake and has been quietly advocating for a similar breakup plan for six months.
Another hedge fund, Starboard Value LP, also has a large position in eBay, of less than 4%, and has broached those same changes with the San Jose, Calif.-based company, according to a person familiar with the matter. Starboard took the stake at least six months ago and recently has been talking to eBay about improving its operations and exploring the split, one of the people said.
eBay has responded to Elliott’s letter, saying
“The eBay Board and leadership team regularly engage with our shareholders and value their input. We are focused on delivering value for our shareholders, customers and employees by driving the best choice, the most relevance and the most powerful selling platform to deliver growth. Accordingly, we appreciate Elliott’s recognition of the strength and power of eBay’s business and will carefully review and evaluate Elliott’s proposals. We look forward to the opportunity to engage with Elliott, as we do with all shareholders.”
TheStreet reports that investors have responded favorably to the proposal, with eBay stock trading up in the ensuing days. It also includes speculation on potential acquirers for the Marketplace stub.
As for who might be interested in such an opportunity, Elliott Management believes that Alphabet (GOOG) , Walmart (WMT) or various private equity firms could be game, CNBC reported, citing a source familiar with the matter. Over the years, others have speculated that Facebook (FB) could be interested in eBay, given its own lagging Marketplace vertical and a 2017 partnership that added eBay deals to Facebook’s app. Others have suggested that Alibaba (BABA) might consider buying the site to expand its global footprint. Elliott Management didn’t respond to a request for comment on prospective buyers of Marketplace.
With Starboard and Elliott both involved, it is exceedingly likely that change is coming to eBay. A spinoff of the StubHub and Classifieds businesses would make a great deal of sense, and give eBay shareholders stakes in three great companies. While both Starboard and Elliott have shown that they are more than willing to launch proxy contests, we think it unlikely that they will need to in this situation.
Dislcosure: The author holds no position in any company mentioned