EBay Inc ( EBAY ) and payments company PayPal may be separating later this year, but in an agreement released Thursday, the two will continue in a partnership extending over the next six years, including a one year transition period.
The agreement, made public in a regulatory filing on Thursday, aims to keep the now independent companies alive and well on their own. However, it also forbids both eBay and PayPal from competing against each other in their main business ventures after they have gone their separate ways.
According to eBay's CEO John Donahoe, the agreement is designed to afford both companies maximum flexibility; both eBay and PayPal are free to negotiate new business enterprises with other companies without one another's approval. "PayPal is free to pursue any merchant, to pursue an Amazon, an Alibaba," said Mr. Donahoe in an interview. "And eBay is free to bring other payment alternatives onto eBay."
The filing did not provide any further details on the split's possible timing later this year.
An important thing to note is that both companies will stay in their respective lines of business. This means that PayPal, for example, cannot create an online marketplace for physical goods. The same rules go for eBay: the e-commerce company cannot craft an online payments system.
Also included in the agreement are details in regards to the makeup of the two companies' respective board of directors. Tom Tierney, a current eBay board member, will become chairman of the new eBay board, joining present CFO Bob Swan and future CEO Devin Wenig. Current eBay CEO Donahoe will chair PayPal's board of directors, which includes upcoming PayPal CEO Dan Schulman. EBay founder and originator Pierre Omidyar will operate on both companies' boards.
In addition to business ventures and new board members, the filing also discussed a particular payment arrangement. EBay has agreed to guarantee that approximately 80% of gross merchandise sales within its online marketplace are forwarded through PayPal for the next five years, similar to the standing rules today. PayPal has agreed to pay eBay if its percentage of revenue on the marketplace grows above that mark.
EBay and PayPal came together back in 2002. PayPal flourished under the eBay umbrella, performing better and growing faster than its sister e-commerce division. EBay may still generate more profit than PayPal, but rivals Amazon.com Inc ( AMZN ) and Alibaba Group Holdings Ltd ( BABA ) have proved stiff competition for the online marketer.
At market close on Friday, shares of eBay Inc were up a minimal 0.58% on the day, closing at $57.34 per share. The company sits at a Zacks Rank #4 (Sell).