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Icahn backs market consolidation after Paypal, eBay split

Published:Friday | October 3, 2014 | 10:00 AM

PayPal's split from long-time partner eBay Inc makes Carl Icahn mighty happy. But he doesn't think PayPal should stay single for long.

Icahn, who months ago called on eBay to spin off the lucrative online and mobile payment service, continues to believe that the payments field must be consolidated, either by PayPal buying up smaller rivals or by merging with another major player.

"In light of the development of strong competition such as the advent of Apple Pay, the sooner these consolidations take place, the better," he wrote on his website Tuesday in the wake of eBay's announcement that it will split off PayPal by the second half of 2015. The companies have been intertwined since eBay bought PayPal 12 years ago for US$1.3 billion.

An independent PayPal will be much more appealing to potential customers like Amazon.com who compete with eBay. And PayPal will have more freedom to aggressively take on new mobile pay challenger Apple Pay.

PayPal services US$1 of every US$6 spent online. It collects fees from over 150 million users who use the online service to send money to other users and pay for goods and services in more than 200 markets.

Huge payoff

The service posted 20 per cent revenue growth in the last quarter to US$1.95 billion - representing nearly half of eBay's total revenue. And it's on track to process one billion mobile payments this year. The company's PayPal Here and One Touch mobile payment service, which it acquired with the purchase of Braintree, compete with players such as Square and Google Wallet.

The payoff is huge for whichever player can ultimately own the digital wallet space: mobile payments could spike to US$58.4 billion by 2017 from just US$1 billion last year, Citi Investment Research analyst Mark May said in August. And the pressure is on. Apple Inc, which has 800 million user accounts through iTunes, threw down a gauntlet last month with the announcement of its own mobile payment service Apple Pay, built into the iPhone 6.

So what might be PayPal's first solo move?

Some analysts say the company could be a takeover target. Google and Microsoft, not to mention Visa and MasterCard, have tried to build online payment platforms with varying degrees of success, notes Cantor Fitzgerald analyst Youssef Squali.

While Google is unmatched in Internet search, it has struggled with Google Wallet and Checkout, and acquiring PayPal could be a way for Google to quickly secure a leadership position in commerce and payments, R.W. Baird analyst Colin Sebastian has suggested. He also points out that PayPal will end up with a sizable amount of cash and none of eBay's debt.

New CEO Dan Schulman will bring both mobile and prepaid payment experience to the company. Schulman, 56, was founding CEO of Virgin Mobile, before leading the prepaid group at Sprint Nextel and most recently expanding mobile and online pay services at American Express. Citi's May noted that few people have that background in financial services, mobile technology and payments - three key strengths to be competitive going forward in digital payments.

The companies have been intertwined since eBay bought PayPal 12 years ago for US$1.3 billion. EBay connects buyers and sellers, and both can use PayPal to make or accept payments.

Besides online payments, PayPal users can also pay for items in some physical stores.

The split comes as competition in the mobile payment industry heats up. Apple Inc announced a new digital wallet service, called Apple Pay, last month.

PayPal and eBay said that the two companies will be led by new CEOs when the deal closes in the second half of 2015.

Here is what the split companies look like:

EBAY INC

REVENUE: US$9.9 billion in the past year

ACTIVE USERS: 149 million

ALSO OWNS: Concert and sports ticket reseller StubHub

FUTURE CEO: Devin Wenig, current president of eBay Marketplaces

PAYPAL

REVENUE: US$7.2 billion in the past year

ACTIVE USERS: 152 million

ALSO OWNS: Payment technology company Braintree, used by start-ups such as vacation rentals website Airbnb

FUTURE CEO: Dan Schulman, former executive at American Express

Here is what the split companies look like:

EBAY INC

REVENUE: US$9.9 billion in

the past year

ACTIVE USERS: 149 million

ALSO OWNS: Concert and

sports ticket reseller StubHub

FUTURE CEO: Devin Wenig,

current president of eBay

Marketplaces

PAYPAL

REVENUE: US$7.2 billion in

the past year

ACTIVE USERS: 152 million

ALSO OWNS: Payment

technology company Braintree,

used by start-ups such as

vacation rentals website Airbnb

FUTURE CEO: Dan

Schulman, former executive

at American Express