Bloomberg News

EBay CEO Huddles With Investors as Icahn Tussle Escalates

March 13, 2014

EBay Inc. Chief Executive Officer John Donahoe

EBay Inc. Chief Executive Officer John Donahoe is working with Brunswick Group and Goldman Sachs Group Inc., and has met with the media as well as large institutional investors to argue that PayPal belongs with EBay. Photographer: Victor J. Blue/Bloomberg

EBay Inc. (EBAY:US) Chief Executive Officer John Donahoe is stepping up his offense against activist Carl Icahn, a sign of the rising stakes in his effort to keep from splitting off the e-commerce company’s PayPal business.

Donahoe, who is combating Icahn’s calls to spin off the payments unit, has consulted with some of the investor’s earlier targets, Apple Inc. CEO Tim Cook and Netflix Inc. CEO Reed Hastings, for advice. He is working with Brunswick Group and Goldman Sachs Group Inc., and has met with the media as well as large institutional investors to argue that PayPal belongs with EBay.

Along the way, EBay and Icahn’s feud has devolved into one of the more acrimonious Silicon Valley tussles, with technology luminaries including LinkedIn Corp. founder Reid Hoffman and EBay directors Marc Andreessen and Pierre Omidyar jumping into the fray. A separation from PayPal would rob EBay of its fastest-growing business, which contributed 42 percent of the company’s $16 billion in total revenue last year. Yet if PayPal were independent, Icahn has said it would attract a “number of bidders willing to pay a large premium.”

“EBay has certainly been aggressive in their responses to Carl,” said Steven Balet, a New York-based managing director at business advisory firm FTI Consulting. “Carl doesn’t go away very quickly.”

Gloves Off

The dispute, which is playing out on social media and in near-daily press releases, contrasts with the more courtly behavior in other recent activist-versus-technology company flare-ups, including Icahn’s duels with Apple and Netflix and Elliott Management Corp.’s targeting of Juniper Networks Inc.

Amanda Miller, a spokeswoman for San Jose, California-based EBay, said in an e-mail, “When statements are made about our company that are factually inaccurate and misleading, then we owe it to our shareholders to set the record straight.” The company has said EBay provides PayPal with data and a strong financial foundation that sets it up for success.

Icahn, who disclosed a 2.2 percent stake in EBay in January and has become its seventh-largest (EBAY:US) shareholder, said in an interview that he intends to keep the fight going.

“Their response has essentially been to say, we don’t want anyone raining on our parade -- we’re the great EBay,” the 78-year-old said. “I never walk away unless there’s a reason to walk away.”

Personal Sniping

The dispute has ramped up since last month as it has gotten personal. Icahn in late February broadened his criticism of EBay to Donahoe and the company’s board. The investor targeted directors Andreessen and Intuit Inc. co-founder Scott Cook, alleging the two are unfit to be EBay board members due to conflicts of interest.

In calling out the directors, Icahn took aim at the clubby world of Silicon Valley, in which executives and venture capitalists often sit on boards of companies that they may compete or transact with through investments or other entities.

Having Andreessen and Cook on EBay’s board is tantamount “to having Pete Carroll, coach of the Seattle Seahawks, sitting in when the Denver Broncos were constructing their game plan for the Super Bowl,” Icahn wrote in a shareholder letter.

Icahn has focused on Andreessen, alleging the venture capitalist unduly profited from EBay’s sale of videoconferencing company Skype in 2009. At the time, an investor group led by Silver Lake Management LLC and including Andreessen’s venture firm purchased a majority stake in Skype, valuing the company at $2.75 billion. In 2011, Microsoft bought Skype for $8.5 billion.

“With EBay it’s almost like the Politburo in Russia, where Stalin would get what he wanted from the Politburo and the Politburo would have their own opportunities to take advantage of their positions,” Icahn said in the interview.

Accusers, Recusers

Andreessen has said he “categorically denies” the accusations and that he recused himself from all deliberations on the Skype transaction. He has said EBay shareholders re-elected him with more than 99 percent of the vote. Andreessen also questioned Icahn’s judgement in the past, including the activist’s dealings with Ivan Boesky, who pleaded guilty in a 1980s insider-trading case.

Margit Wennmachers, a spokeswoman at Andreessen’s venture firm Andreessen Horowitz, declined to comment. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz. Intuit’s Cook didn’t respond to a request for comment.

“Both sides have personalized the issues,” said Scott Galloway, a professor of marketing at New York University.

Defending Donahoe

Icahn yesterday issued a shareholder letter saying EBay’s board had suffered a “complete and utter breakdown in the system of checks and balances” with the Skype deal. Earlier this week, EBay released a statement praising Donahoe and filed a proxy rejecting Icahn’s two board nominees.

“The board, together with management and external advisers, has assessed a spinoff of PayPal several times and continues to believe that each of the company’s payments and commerce segments are stronger together,” EBay’s filing said.

The duel has become the talk of Silicon Valley. LinkedIn’s Hoffman, who worked at PayPal earlier in his career, last week penned a blog post arguing the payments business is better off within EBay and that Icahn is engaged in “classic market exploitation.” Peter Thiel, a PayPal co-founder, has said he is “viscerally against” Icahn’s approach.

Other technology executives including PayPal co-founder Elon Musk and payments entrepreneurs have said EBay has held back the business.

“EBay forced PayPal to do what was best for EBay, allowing other emerging online-payments companies to come into existence and thrive,” said Matt Golis, CEO of payments startup YapStone Inc. in Walnut Creek, California.

Once Polite

The rhetoric contrasts with the initially polite tone between Icahn and EBay. In January, before Icahn’s stake in the company became public, Donahoe received a letter from the investor and spoke with him by phone. The CEO, in an interview on Jan. 22, said the conversation was “very pleasant.”

Donahoe and Icahn later engaged in more conversations, including by phone on Feb. 22, according to a regulatory filing (EBAY:US). Two days later, Icahn attacked EBay’s corporate governance. Earlier this month, Donahoe and Icahn spoke again by phone and met in person, according to the filing.

Investor Outreach

EBay executives including Donahoe have meanwhile reached out to investors. At a conference hosted by Morgan Stanley in San Francisco last week, Chief Financial Officer Robert Swan said a unified EBay and PayPal “is the most value-creating opportunity for EBay shareholders.”

EBay has said that based on conversations with most of its top 20 shareholders, there is strong support for keeping the company together.

In an open letter to Icahn yesterday, William Smead, CEO of Smead Capital Management in Seattle, said the activist’s efforts could hurt EBay in the long run.

“While we agree that spinning out PayPal would give the company a short-term boost in stock price, we believe it will get in the way of all the money that John Donahoe and his team can make us over the next 10 to 20 years,” Smead said.

Todd Lowenstein, a portfolio manager at Highmark Capital Management in Los Angeles, said he hasn’t made up his mind on PayPal and wants both Icahn and EBay to make more of their cases.

“I’d like to see the arguments posed on both sides,” said Lowenstein, whose firm owns shares of EBay.

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Beth Jinks in New York at bjinks1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net; Mohammed Hadi at mhadi1@bloomberg.net Elizabeth Wollman


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