Wednesday, June 30, 2010

eBay: Buyout or Breakup?

Another day, another swoon in the stock market.  The economy isn't growing!  Oh no.  Quick sell your stocks.  You'll feel better, right?!?  But wait.  When a stock is selling for 6x fcf, is it really priced for growth?  Or death?  And I thought risk wa a function of price.  Lower in price = less risk? I must be wrong.

Fearful investors continue to stand in line to lend Uncle Sam money.  3.5% over 10 years?  Sure, sign me up.  After all, there's no risk here.  How could there be?  These people have very simple operating rules.
Rule #1 - Borrow a bunch of money and spend it.
Rule #2 - Repeat Rule #1 regardless of results.
Call me crazy, but I prefer the private sector.   Under-leveraged and profitable aren't adjectives that are typically ascribed to governments these days, Greek or otherwise.  Yet Mr. Market continues to offer up such companies every day at reasonable prices.   

So despite (or because of) the continuing drop in equity prices, I skipped the Treasury line again today.  My stock du jour is: eBay (EBAY).  It's not a new idea, just a new price, having bought eBay at $12 (Jan 2009) and having sold at $24.50 (October 2009).

At $19.85, I decided to start buying again.  The current market value of $26 billion seems reasonable for a company with $5 billion in excess cash, no debt, a 30% stake in Skype, and ample free cash flow (of $400 to $500 million per quarter).  Analysts are generally negative about the Marketplace (auction/retail) business and positive about PayPal (online payments) business.  The growth in PayPal's float (translation: other people's money that eBay holds, but doesn't pay for) to $2.3 billion is impressive.  Nontheless, the Marketplace businesses generate piles of cash.  And as an exchange, eBay isn't stuck holding a lot of inventory.  Those 20+% net margins are nice too.

Either way, investors don't have to be unduly excited about either to see upside from current levels.  There's even some talk of eBay becoming a buyout target.  Given the numbers above, the speculation is understandable from a financial standpoint, but not from a practical one.

At the current price, eBay is hardly a small company.  The number of potential buyers who could afford eBay (in its entirety) is quite small.  Wal-Mart (WMT)?  Amazon (AMZN)?  Both companies are big enough to buy eBay, but they'd each end up with something they don't want.

Let's face it, eBay is an odd conglomeration of assets, most of which are worth more as part of another whole.

The Marketplace division may interest Wal-Mart, if it wants to bulk up its online business.  Amazon might want it to bootstrap into its current valuation and provide an opportunity for cost cutting. PayPal would most likely attract a financial buyer.  I'm thinking of American Express (AXP), which recently made an online payment acquisition or even JP Morgan Chase (JPM).  The Skype stake also has a separate set up prospective buyers.  The consortium that recently bought the other 70% seems logical, but a host of telecom firms could also be interested.

The proceeds of these sales plus the huge net cash position at eBay would treat shareholders to a hefty payday. But don't hold your breath.  I'm not expecting eBay to announce a liquidation of the company... ever.  But this would be the best option for investors.

 As a standalone company or as a liquidation play, eBay deserves consideration.  But if you're buying it in hopes of buyout, don't bother.

Disclosure: Long EBAY.


  1. Been following you for awhile. Keep up the good work. I just started a deep dive into Ebay and getting very interested. I'm really focused on the Paypal valuation compared to other payment processors and then looking at how cheap I get Ebay with zero debt and cash in the process. Take a look at Visa, Discover, etc. and look at the multiplies on that business. I believe Paypal's revenue is now over 50% from 3rd party vs Ebay with a a huge growth rate over the last two years. Other thing of great interest to me is that 40% of Ebay revenue is from international. I'll post again after I have some time for full analysis.

  2. Thanks Anonymous... look forward to your findings. And please share your "name"!