Mix one part iconic activist investor (Carl Icahn), with two
parts iconic corporation (eBay, PayPal) and you have the recipe
for financial drama. Add a dash of personal animosity, and you
have a full-fledged soap opera. Just such a show may be the aim
of recent theatrics between Icahn and eBay.
In January, Icahn purchased a block of eBay stock. Almost
immediately, he began a push to have the company spin off
, while at the same time nominating two of his employees to join
the eBay board. eBay subsequently rejected the nominees, saying
that neither was qualified. Icahn quickly responded with an open
letter to eBay stockholders. In the letter, Icahn berated eBay
CEO John Donohoe for his "inexcusable incompetence," while
calling into question his handling of the company's sale of
. The letter went on to accuse eBay board members Marc Andreessen
and Scott Cook of having "material conflicts of interest."
eBay responded by calling the attacks a "charade." Donohoe has
suggested that Icahn's attacks were intended to provide short
term pop for eBay stock and drive up Paypal's value ahead of its
sale, a strategy he denigrates as "short-term financial
Beyond the rhetoric lies an argument over PayPal's value to
eBay, as opposed to eBay's value to PayPal. The Icahn camp would
argue that PayPal is held back by eBay culture. Icahn suggested
that PayPal cannot attract top talent while tethered to eBay.
Others have pointed to an overlap of functions that leads to
repetition of work PayPal founder Elon Musk has said of
eBay owning Paypal, "It's as if Target owned Visa or
Most analysts agree with Donohoe that PayPal benefits from
synergies within the eBay enterprise. Because of its established
eBay business, Paypal is able to keep margins low in areas where
it is trying to expand. eBay data is used by PayPal for fraud
checking and customer mining. These analysts point to PayPal's
expansion into the credit business as an example of the
opportunities for growth afforded by the relationship with eBay.
"Bill Me Later" provides credit to buyers in the eBay Marketplace
while "Working Capital" is providing small business loans for
Reid Hoffman, one of the founding board members at Paypal,
believes that the true question is "What conditions will
allow Paypal the best opportunity to grow its customer base?"
Hoffman sees the squabble as a classic example of the clash
between Wall Street short term profit taking and Silicon Valley
long term innovation. In his view, PayPal, and consequently,
eBay, will profit most by maintaining their existing
Whether Icahn prevails and drives up the stock price while
extracting a premium price for PayPal, or Donohoe holds on to
PayPal and continues to reap the benefits of their association,
eBay stands to emerge as a winner. Either of these outcomes
supports pursuing a bull-put credit spread on EBAY. Look at the
October 45/50 bull-put credit spread for at least a $0.20 credit.
You will need to use limit orders to place this trade. This trade
has a target return of 4.2% over 51 days, which is an annualized
return of 30.06%, (for comparison purposes only). EBAY stock has
to fall 9.7% to cause a problem. Be aware that this is an
aggressive trade, best undertaken by investors with diverse
portfolios and high tolerance for risk.