EBay Should Split Up

 | Aug 23, 2014 | 10:30 AM EDT
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On Thursday, a report emerged that eBay (EBAY) is thinking of spinning out its PayPal unit in 2015, according to what prospective hires said the company told them. Shares of the company jumped on the report, but they sank a bit Friday after the company issued a denial.

Regardless, eBay should certainly split itself up.

When you examine the company's most recent 10-Q with the SEC, what's interesting is that the payments segment – PayPal -- surpassed the marketplaces segment in net transaction revenue.

What's eBay really worth? Today, the combined company trades at a trailing price-to-sales multiple of 4x. Yet that encompasses both the marketplaces business, which is growing revenue at 9% annually, and a PayPal business that's growing its top line at 18% per year.

If the company splits up, the marketplaces unit would likely keep trading at a 4x multiple. That means the old eBay business, along with GSI Logistics, would be worth around $31 billion.

All of eBay today is worth $69 billion. The PayPal segment would possibly start trading at a 10x multiple, so it could be valued as much as $70 billion. Combined, therefore, the two parts are worth $101 billion, with another $2 billion in net cash. So on a per-share basis, eBay as two parts should be worth the equivalent of $83 per share, or 49% higher than its current price.

Yet the all-time high for eBay's shares -- which they hit within the last year -- was $59.70. The company's peak market capitalization, of just over $75 billion, was hit in early 2005. That was during the dying days of Meg Whitman's tenure, just before she agreed to buy Skype.

A split would help PayPal grow much more quickly than what it's presently doing within eBay. A split might also make eBay itself a more attractive acquisition target for other companies looking to attack Amazon (AMZN) more effectively.

Personally, I see the spinoff as inevitable, and I believe it should occur next year. That's despite the fact that, earlier this year, CEO John Donahoe protested that it would never occur when he was fighting off Carl Icahn's activism.

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