July 8, 2002, 12:00 AM

eBay agrees to acquire PayPal in $1.5 billion stock swap

The deal widens the small-merchant marketplace for eBay and readies it for movement toward a more general marketplace. PayPal shareholders, which hold 60.6 million shares, will receive 0.39 shares of eBay for every share of PayPal.

Less than six months after online payment service PayPal Inc. went public and raised $70.2 million by selling 5.4 million shares, EBay Inc. has agreed to acquire it for $1.5 billion. The move is expected to strengthen eBay’s offering to online sellers. The deal, a stock for stock transaction in which eBay will acquire all of PayPal’s outstanding shares at an exchange ratio of 0.39 eBay shares for each PayPal share, is expected to clear stockholder, regulatory and government approvals and close around year-end. PayPal has 60.6 million shares outstanding.

“EBay and PayPal have complementary missions. We both empower people to buy and sell online. Together we can improve the user experience and make online trading more compelling. We can also capture greater value from the e-commerce opportunities occurring both on and off our sites,” said Meg Whitman, eBay CEO.

About 60% of PayPal’s business already is in transactions on eBay. The remaining 40% is primarily with smaller merchants who are a potential new market for eBay. The deal lets eBay offer a full service package to small merchants including access to the online marketplace, help with online promotion, and online payment service. “It will allow the smaller merchant to avoid having to take out a credit card merchant account, which some of them might not be able to get or afford,” says Aaron McPherson, research manger at IDC Research Inc.

“This may affect eBay’s growth in terms of sellers because it gives them a more compelling offering for more merchants,” he adds. “The auction model continues to be very important for eBay, but it seems clear that their main strategy is to expand from simple auctions to become more of a general purpose marketplace.”

Though eBay has said that PayPal will continue to operate as an independent brand, the deal could present some potential hindrances to that growth strategy. EBay has said it will phase out Billpoint, its own online payment system, after the acquisition closes, but some analysts say that to the extent PayPal would be 100% owned by eBay, some merchants may see that as limiting them from accessing other online marketplaces like Yahoo Shopping. And although shuttering Billpoint removes a degree of competition in the online payment services market, PayPal could soon face a new wave of it in bank supported or credit card association supported online payment services now in development. “Banks want to own this,” says McPherson of online payment services, particularly as aimed at smaller merchants. “They see it as an extension of their other services.”

PayPal went public in February, selling 5.4 million shares at $13 each, for a total of $70.2 million. It recently announced a second offering of 6 million shares at $19 a share.

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