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Analysis: Thompson exit puts focus on PayPal spin-off

By Alistair Barr

(Reuters) - The surprise departure of PayPal President Scott Thompson from eBay Inc could seriously set back any moves to spin-off the payments business as a separate company, investors and analysts said on Wednesday.

Thompson was named chief executive officer of Yahoo! Inc. EBay Chief Executive John Donahoe said in an internal memo that he was told about the move on Tuesday and was shocked.

EBay shares closed down 3.8 percent at $30.16 on Wednesday.

The decline was partly driven by Donahoe's admission that Thompson's departure was a shock, but the stock was also weak because a PayPal spin-off is less likely now, according to RJ Hottovy, an equity analyst at Morningstar.

"I don't think we will see a spin-off any time soon. The departure of Thompson puts that even further into question," Hottovy said.

PayPal started life as an independent company, founded in the late 1990s by technology entrepreneurs, including venture capital investor Peter Thiel. The business battled with eBay for supremacy in the emerging online payments market. But soon after it went public in 2002, eBay acquired PayPal for $1.5 billion.

Thompson, a veteran of the electronic payments business, led PayPal from early 2008. During that time total payment volume jumped 26 percent a year to over $120 billion, while the number of users more than doubled to at least 104 million.

Meanwhile, eBay's main online Marketplaces business struggled to keep pace with Amazon.com Inc and the growth of e-commerce in general.

HALF OF EBAY

PayPal's higher growth potential means it accounts for about half of the $40 billion market value of eBay, which also includes e-commerce business GSI Commerce.

Aaron Kessler, an analyst at Raymond James, estimates PayPal at 47 percent of eBay's value. By 2013, PayPal will likely generate almost a third of the company's earnings per share, but it is growing at about twice the rate of eBay's Marketplaces business, the analyst noted.

That growth means PayPal would trade at about 22 times earnings if it was an independent company, according to Kessler. The analyst reckons eBay's Marketplaces business trades at 11 times profit, while GSI Commerce has an earnings multiple of about 20.

"If eBay felt they weren't getting the proper value for PayPal, they could spin it off to increase shareholder value," Kessler said. "Thompson's departure shows investors that they are unlikely to see a PayPal spin-off near term."

INCENTIVES, ACCEPTANCE

Having a faster-growing business buried in a larger company sometimes makes it hard to incentivize executives and keep them around. If executives running the faster-growing part have equity in the holding company, they may not see their wealth increase in line with the more successful unit. This can make them more prone to be poached by rival companies.

"This argues for this company to be split in two, or to create a tracking stock for the PayPal business," said Bill Smead of asset management firm Smead Capital Management, which owns eBay shares. "Scott Thompson could have been the CEO of an independent PayPal business and would have been better incentivized when the head-hunters came calling."

PayPal might also be accepted as a payment option by more online retailers and marketplaces if it was not seen as part of eBay - a potential e-commerce rival.

"Sometimes PayPal's attachment to eBay can be a deterrent for eBay's indirect competitors," Hottovy said. "That's the main reason why PayPal should be separated."

DIVIDEND

A company spokesman said eBay CEO Donahoe and other executives were not available to comment on Wednesday.

Donahoe said at a company conference in October that there were no plans for a spin-off of PayPal.

EBay investor Smead would prefer the company start paying a dividend, arguing this would be another way to get the shares moving and reward executives, including those still running PayPal.

"Virtually everything is in place, but they can't get the investment community to fall in love with them," Smead said.

"There is little connection between the future cash flows of the business and cash flows to investors. Stock appreciation would fix this, but paying a dividend would be a quicker solution."

OTHER PAYPAL EXECUTIVES

While Thompson's departure is a loss for PayPal, other executives can lead the business, Smead and others said.

PayPal could hire from within and candidates include Chief Marketing Officer Ranjana Clark and Ed Eger, general manager for North America, according to Colin Sebastian, an analyst at RW Baird.

Other PayPal executives include Chief Financial Officer Patrick Dupuis; head of mobile strategy David Marcus; and Gary Marino, senior vice president of credit and risk.

Thompson was credited with the vision of taking PayPal from its online stronghold into the offline world where its payment technology may be accepted in physical stores - a much bigger opportunity.

Last year, PayPal brought on Don Kingsborough to help execute on that plan. Kingsborough founded Blackhawk Network, a leading prepaid card business that is now owned by Safeway Inc.

EBay stressed on Wednesday that Kingsborough will stick around to continue the offline project, Hottovy noted.

EBay also told analysts on Wednesday it was sticking with forecasts for PayPal in 2013. The company expects PayPal revenue of $6 billion to $7 billion and a profit margin for the business of 24 percent to 26 percent that year, Hottovy noted.

(Reporting by Alistair Barr; editing by Andre Grenon)

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