RealTime IT News

eBay Shells Out $1.5 Billion for PayPal

Online payment service Paypal proved it had legs when it went public last February at $13 a share, and Monday the whole enchilada paid off as eBay agreed to pay $1.5 billion for the company, already used by lots of buyers and sellers at the giant auction site.

San Jose, Calif.-based eBay , which also said today that it will post a second quarter profit of 19 cents a share, will acquire all the outstanding shares of Mountain View, Calif.-based PayPal in a tax-free, stock-for-stock transaction using a fixed exchange ratio of 0.39 eBay shares for each PayPal share.

That values PayPal at about $23.61 per share based on eBay's Friday closing price of $60.55. PayPal closed Friday at $20, down from its all-time high of $30 plus a share. eBay is paying a premium of about 18 percent for PayPal.

On the PayPal deal, which many analysts had been expecting because of the obvious synergy, eBay CEO Meg Whitman said: "eBay and PayPal have complementary missions. We both empower people to buy and sell online. Together we can improve the user experience and make online trading more compelling..."

Some analysts agreed eBay paid a hefty price.

"It's certainly a lot of money," Paul Ritter, program manager for Yankee Group's Internet Business Strategies unit, told internetnews.com. "But it leverages both companies' base of customers and provides an opportunity to capture more business from that combination ... (however) they will need to do a good job of really increasing the amount of usage of PayPal services to recoup their investment."

Others thought the price was fair.

"The 18 percent premium eBay is paying for PayPal does not seem to be too much to pay for a company with a lot of growth left in it," said Geoff Wissman, an analyst at retail marketing consulting firm RetailForward.

"I think the deal makes a lot of sense," Wissman told internetnews.com, adding that "eBay had been trying to grow its own type of service -- they got behind the curve and PayPal cemented itself as the preferred way to make auction payments."

PayPal will retain its brand, which makes sense, as the outfit reaps 60 percent of its business from eBay users. eBay's current payment service, eBay Payments by Billpoint, will be phased out after the close of the transaction. PayPal, which takes a cut of each money transfer, said it facilitated about $1.6 billion in money transfers in the most recent quarter.

eBay said the acquisition, expected to close around the end of the year (PayPal CEO Peter Thiel stays on and will report to Whitman), is expected to be immediately accretive to its pro-forma earnings per share.

eBay also plans to phase out PayPal's services for gaming operations, "in view of the uncertain regulatory environment."

On the earnings front, eBay exceeded its own projections. It had estimated revenues would be in the range of $260 million to $265 million, with earnings, excluding any charges, of 17 cents per share. Year-over-year growth from domestic operation was up 48 percent; revenue from international operations was up 148 percent.