Separation set to benefit both eBay and PayPal

The online pairing is a prime example of how two divisions that were originally very well suited to each other have grown apart.

eBay logo
Source: Bloomberg

The markets have seen plenty of M&A activity over the year but we’ve also seen some very high profile separations. The looming split of PayPal and eBay should not be seen as a divorce, but more as an opportunity for both to spread their wings. Although initially both parties found a plethora of synergies, the development of their respective business plans has seen these benefits diminish over the years. A new freedom to focus independently on their own business models should see both companies improve capital returns – gains that subsequently will be reflected in their share prices.

At the moment PayPal is being traded on a “when issued” basis, but the majority of shares will be free to trade from Friday 17 July onwards. In order to help the newly independent company in the initial stages it has received a $5 billion float from eBay. The new CEO of PayPal has not been slow to spend this; even before the separation was completed the City became aware of plans to acquire transfer provider Xoom. It’s anticipated that PayPal will go it alone with a market capitalisation of around $44 billion, which should equate to a share price of $36.

The day before the PayPal shares start trading, eBay will release its second-quarter figures. The adjusted earnings per share are expected to increase year-on-year from $0.69 in 2014 to $0.725. The firm’s sales are also projected to improve from $4.366 billion to $4.489 billion in 2015. These improving figures have seen the online auction house’s pre-tax profits increase from $803 million to $1.11 billion.

All of this has seen the institutional analysts remain fairly bullish on the company with 21 buy recommendations, 25 holds, and only three sell recommendations. The average twelve-month price target for the company is $63.99 – higher than the current $61.29

The company’s share price has enjoyed a strong bullish run over the last twelve months, which has seen shares add almost 21% in that time. Although the markets might have some reservations about the diversification that eBay is due to embark upon, the more streamlined company could well offer even more rewards in the future.

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