PayPal in Play for Google as Leftover EBay Invites LBO

A split of EBay Inc. may put the pieces in play.

EBay announced yesterday that it’s spinning off the PayPal payment-services business from its online marketplaces to unlock value at a $70 billion company whose valuation has been sagging lately. The move may make either half of the San Jose, California-based company a target as industry acquirers from Alibaba Group Holding Ltd. to Google Inc. seek ways to further their dominance of the Internet.

With a takeover of PayPal, Google would stand to become the leader in online payments, which could be integrated into its Android system and counter Apple Inc.’s new Apple Pay, according to Gene Munster, an analyst at Piper Jaffray Cos. Alibaba, the Chinese e-commerce giant that just pulled off a record U.S. trading debut and is on the hunt for deals, also could take an interest in PayPal, said Daniel Johnson, a money manager at River Road Asset Management LLC. EBay marketplaces could draw bids, too, because its robust cash flow would appeal to buyout firms, he said.

“Now that PayPal will be a separate company, there’s absolutely a possibility of an acquisition,” Johnson, whose firm oversees about $10 billion and owns EBay stock, said in a phone interview from Louisville, Kentucky. “There’s a strategic benefit that PayPal would bring, whether it’s to Google or Alibaba.”

Cash Cow

Private-equity suitors “could see the value of the underlying cash flows at EBay marketplaces and the ability to leverage those cash flows to make an attractive return,” he said.

While Johnson’s sum-of-the-parts estimate for EBay is in the mid-$60s, he said strategic buyers may be willing to pay a much higher price because of what they’d be gaining.

EBay closed yesterday at $56.63.

It could cost Google $50 billion to $62 billion to buy PayPal alone, according to an estimate in a Sept. 15 report by Piper Jaffray’s Munster.

Representatives for Alibaba and Google declined to comment.

CEO Comments

When asked about the potential for a takeover, EBay Chief Executive Officer John Donahoe said a deal isn’t the motivation behind the split.

“This is clearly not being done to set any business up for sale,” Donahoe said in an interview yesterday. “This is being set up for each business to compete and succeed in their respective environments.”

The split comes after EBay’s valuation fell to 2011 levels. Its enterprise value was 13 times trailing 12-month earnings before interest, taxes, depreciation and amortization as of Sept. 29, compared with a ratio of more than 16 less than two years ago, according to data compiled by Bloomberg. It’s half of Inc.’s Ebitda multiple of 32.

In the 12 months through Sept. 29, EBay posted the fifth-worst performance among technology stocks in the Standard & Poor’s 500 Index, data compiled by Bloomberg show.

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