As eBay’s May 13 annual stockholders’ meeting approaches, the e-commerce giant has published another letter to shareholders to drive home its opposition to activist investor Carl Icahn, his belief that PayPal should be spun off, and the appointment of two Icahn-backed board members.
If you thought that eBay was on shaky ground with Icahn before now, today’s letter, also reprinted in this SEC filing, feels like eBay’s most confident rebuttal yet. That’s bolstered by the fact that last week, Icahn himself appeared to step away from his original spinoff suggestion, with a revised idea for eBay to hold on to PayPal but spin off 20% to the public.
“We have evaluated carefully Mr. Icahn’s proposal to spin off PayPal. We do not support it. Mr. Icahn’s proposal is not a new idea, and Mr. Icahn himself recently backed away from supporting his own proposal,” the letter notes.
Part of what the company has been doing to defend its position is to keep noting that Icahn’s ideas are not new, but when they’ve been considered in the past they’ve been viewed as not “in the best interests” of the company.
“The eBay Inc. Board of Directors has previously considered this idea closely. We also have had many discussions with shareholders,” the letter notes. “Our board is in unanimous agreement that neither Mr. Icahn’s breakup proposal nor his nominees are in the best interests of eBay’s shareholders.”
As Icahn’s latest 20% suggestion was made on his blog, and not in an official appeal to eBay, the company is continuing to respond to Icahn’s original spinoff suggestion, and the rest of his proposals.
“Our shareholders and our customers are best served by keeping PayPal and eBay together,” noted the letter signed by chairman Pierre Omidyar, CEO John Donahoe and independent board director Thomas Tierney. “No other payments competitor has achieved PayPal’s success—because no other competitor has had a commerce platform like eBay.”
More importantly, Icahn has continued to press for two Icahn-backed new board members, an area where eBay is getting increasingly strong-worded, too, highlighting their lack of impartiality and experience:
“Mr. Icahn has nominated to your board two of his employees, Jonathan Christodoro and Daniel Ninivaggi, who have no relevant leadership or operational experience in technology. Both are overboarded under eBay’s policies – both of them are already on four public company boards, and Mr. Ninivaggi is a Co-CEO of one of Mr. Icahn’s controlled companies,” eBay writes. “Mr. Christodoro is a recent graduate of business school with a few years of experience on Wall Street. He joined all four of his boards following Icahn pressure on those companies and has less than one year on average of experience on each board he has served on. Both individuals are contractually bound to Icahn affiliates and are required to hold business opportunities and investments in a fiduciary capacity for the benefit of those Icahn affiliates, preventing them from being truly independent directors. Mr. Icahn appears to have put little consideration into his selection of nominees to the eBay board, and we encourage shareholders to reject his unqualified nominees.”
To be fair, you can see where Icahn, doing some basic math, might be wondering if eBay is the best custodian to fully realise the commercial opportunity with PayPal. eBay notes that the commerce market today is worth $10 trillion, but eBay itself, through its eBay Marketplaces, PayPal, and eBay Enterprise business units, reported enabled commerce volume of only $212 billion (up 21% from the prior year).
Whether that squares up with bigger concepts of how e-commerce is developing, and how tech companies work, however, is another matter. So in response, the basic points that eBay has been making about why PayPal should remain a part of the company are based largely around arguments that eBay gives PayPal economies of scale it wouldn’t have otherwise — and vice versa. The company notes that eBay helps PayPal grow faster; that the two share a lot of data, making that growth more profitable; that eBay supports PayPal with capital; and that commerce and payments continue to converge.
You can interpret the last of these in two different ways, both with a view to higher margins. From the perspective of eBay, increasingly those who sell things are actually controlling how payments are processed underneath that.
Conversely — and maybe more importantly — those who provide a payments layer on digital platforms are increasingly moving into commerce. The reason for this is relatively simple: the margins on basic payments processing are low enough that this is essentially a volume game, so to help create additional revenue streams, it makes sense for those providing payments to expand what they do.
You can see both PayPal and its competitors developing services around this idea. For example PayPal has been rolling out a service to let restaurant customers “check in” at restaurants and pay via a code sent through the PayPal mobile app. Square’s Market, meanwhile, lets people shop for goods online.
Given the back and forth between Icahn and eBay, we’ll look out to see if and how Icahn responds to this latest letter and will update as we learn more.