eBay acquires PayPal for $1.5b on eve of strong 2Q report: high ticket overshadowed by talk of $1b year - Brief Article

DSN Retailing Today, July 29, 2002 by Molly Prior

SAN JOSE, CALIF. -- The determined growth of eBay, arguably the world's best-known online shopping bazaar, has earned the e-tailer a spot on Standard & Poor's 500 index for the first time last month. Now, in an effort to keep its momentum rolling and its pool of 46 million worldwide users happy, eBay has agreed to shell out $1.5 billion to buy PayPal, an online payment platform.

The company is calling the acquisition of PayPal, already a function on the eBay site, a natural extension of eBay's trading platform. In addition, pulling PayPal under the eBay umbrella will create a more efficient global online marketplace, one that strengthens the user experience by allowing buyers and sellers to trade with greater ease.

"EBay and PayPal have built vibrant user networks on the Internet," said Peter Thiel, founder and ceo of PayPal. "The beauty of the deal is it will allow us to offer our communities new tools and added flexibility to do more business."

That said, PayPal will continue to operate as an independent brand, which primarily serves smaller online merchants that essentially accept PayPal as a form of currency. PayPal will continue to provide consumer services, such as its Web Accept product, which allows independent merchants to accept payment directly at their Web sites. However, eBay has announced plans to phase out PayPal's gaming business after the transaction closes.

About 60% of PayPal's business takes place on eBay. This deal marks the end of eBay's current payment service, dubbed eBay Payments by Bill-point, which industry sources say eBay never got off the ground. PayPal fills the niche of person-to-person transactions, said Forrester Research retail analyst Jim Crawford. "The deal clearly shows PayPal will continue down that route."

While several industry pundits have questioned the price tag of PayPal--Stan Prescott, strategic analyst at Frost and Sullivan, called $1.5 billion "suspiciously high"--Crawford views the acquisition as a solid long-term investment.

Crawford points outs PayPal did have a successful IPO during a risk-adverse environment, which should help prove its clout with the investment community. "PayPal is as much an infrastructure investment as it is a revenue generator," said Crawford. "There will be lots of intangible ROI." One thing for certain, he added, is the acquisition will established PayPal as the dominant player in the space.

But in a troubled economy, many analysts are ignoring the intangible, preferring to concentrate only on the bottom line. Morningstar.com analyst David Kathman told the E-Commerce Times the $1.5 billion price is 7.7 times the acquired company's annual revenue run rate--based on the company's first quarter revenue of $49 million.

Yet none of that may matter given the financial standpoint of eBay, which has been steadily getting stronger over the past year. For its second quarter ended June 30, eBay reported revenue of $266.3 million compared with $180.9 million the previous year, which the company said will put it on track to $1 billion. Net income rose to $54.3 million, or 19 cents per diluted share, compared with $24.6 million, or 9 cents per share, in the prior year.

EBay will likely profit from a portion of all transactions processed by PayPal, but most agree profits will significantly gap the valuation of $1.5 billion. EBay's take is that the combination of the two networks should expand the eBay and PayPal platforms, while minimizing shared operational costs. The deal, subject to shareholder, government and regulatory approval, is expected to close around year-end 2002.