eBay and PayPal merger: integration and strategic outcomes

eBay PayPal Merger

Growth in business comes from the joining of synergy to produce savings and necessarily growth, which lead to better profits. EBay is one of the greatest creations of the Internet in buying and selling, and it seems to be a continuously growing operation. The approach to the potential user is extremely friendly; the site gives good quality products which builds up the faith of the customers about the site, and there is regularly an interaction between the buyers and the sellers which also helps to a large extent in advertising the site. The user pays only a small fee for listing the product to be sold on the site and then a fee to be paid on completion of sales. It is possible to sell practically anything and everything on the site, from things like old cars to tickets for baseball games. The prices that can be realized depend on the consumer demand for the product. The objective of the site is to meet the miscellaneous requirements of the consumers and this is reflected in the fact that there are over 100 million items listed on the site at any given time. On the other side, pay Pal is a funding organization for the sales and purchase on the net through EBay. It was not a part of EBay, and the financial transactions could be done anywhere after the sales and purchase was completed at EBay. Now it is expected that both will be completed at EBay through the tie up with Pay Pal. EBay and Pay Pal have always been complementary operations, and the merger can only help both sites to grow.

There are many reasons that can be ascribed as contributing to the success of EBay. They have no warehouses or inventory adding to their expenses for storing the items. Everything that they sell exists only as entries on the Internet. Physically this may mean a certain amount of computer storage capacity. The operations of their computers are based on the latest programming. This enables them to track down every auction that is conducted. They check all the activity that goes on in the Internet regarding auctions and trading. This puts them in touch with all the buyers and sellers. This knowledge is used by them later in buying and selling of the goods that are given to them for selling. As mentioned earlier, the first step for anybody trying to sell through EBay is to fill out the readymade forms that are available on the computer. The forms are also available for helping potential buyers locate whatever they may want to buy. There are no fixed terms that everybody has to accept. The first step is for the auction to end. Then the buyer and the seller decide on the settlement of the deal regarding factors like payment terms, shipping method and location for shipping. All these records have to be stored on the site of EBay. This demonstrates to other buyers and sellers that they are reliable parties. The availability of this information on the site also helps EBay through more purchases and sales. (What is this hot Dot-Com business?)

Compared to this rather creative idea of creating a website for auction, Pay Pal is only a payment mechanism. They do not have as good a reputation. Once a person accepts the Terms of Service offered by Pay Pal, the person automatically waives all his rights under the credit card consumer protection laws. In the case of credit cards, the customer is allowed to charge back anything that he is not satisfied with, but this facility is not available under Pay Pal. The legality of this stance by Pay Pal is unknown, but this is imposed by Pay Pal, as per the statements made today. It has been claimed that Pay Pal does not disclose their telephone numbers, and only give out form e-mails for their clients to contact them. It has been stated by their representatives that they intentionally hide their phone numbers. To find out the number, the customer first has to click on the help at the top of their webpage, and then on "contact us" at the bottom left of the page that will appear. Then another page will appear and the customer has to click on "Customer support enquiries" near the middle of the page that appears. This leads one on to another page and there is a section on "Service Center" in the bottom half of the page, where one has to click on the help by phone category. The non-toll free number that they provide is noted there. Considering the fact that in today's world people like things done rather fast, this is a rather long-drawn out procedure. (Welcome to NoPayPal)

Apart from not informing people about their own telephone numbers, they also do not disclose their own service conditions. They also do not mention to the potential users that Pay Pal does not carry any of the risks and all the risks are to be borne by the potential customer. This has led to situations in the past where Pay Pal has withdrawn all the money available in the customer's accounts. This is not only the credit card accounts that we are referring to, but also the savings or other accounts. Due to the signed agreement, the customers cannot get any benefit from any appeal. They also do not respond to any action of customers they feel have taken any questionable action. They are not normally interested in the viewpoint held by the customer. They also do not provide any details of the investigation they have conducted. They just send an e-mail which says "Thank you for contacting PayPal. We apologize for the delay in responding to your service request. After review, the decision has been made to keep your account locked. This decision cannot be appealed. (Welcome to NoPayPal)

If you have any further questions, please reply to this email." There is normally no further correspondence that is encouraged by Pay Pal. You may get some more e-mails saying basically the same thing. By Pay Pal, you are held responsible for someone paying you with a doubtful credit card. Pay Pal have themselves said that they will treat the account then as one with criminal behavior. They will also confiscate any money that is then lying in the account. When the customer does not agree with the charge as mentioned by Pay Pal, they do the same thing to the account. The cost of funding by Pay Pal is very high at 2.9% plus the $.35 per transaction. This is high compared to the charges by banks of around $0.05 to $0.12 per check that you deal through them. Even the charges for a money order is around $o.50 to $1. The charges for decent credit cards are about 2.3%. The total charges by Pay Pal are quite high and come to about $3.00 per $10. Earlier, they used to be very cheap, bit now they are pretty expensive. (Welcome to NoPayPal)

The biggest factor of Pay Pal is that they have the same charges for non-credit financing in the same manner as they have for credit cards. A fee for financing credit card deals is understood as the card itself will charge the fees to Pay Pal. On top of that there are often a lot of frauds in deals associated with credit cards. The problem is that when deals are made from one Pay Pal account to another Pay Pal account. Then the money exists, or is just transferred from one account to another, and there is no question of collecting funds from any credit card. Yet, the fees charged by Pay Pal is the same. These sorts of transactions make a lot of money for Pay Pal, when it is just a transfer entry in the computer system. This is just making a lot of money without doing any service. (Welcome to NoPayPal)

EBay on the other hand is a market place based on the Web. Here the buyers and sellers view items together in the virtual reality of the Web. They browse, buy and sell different items. The Pay Pal service just permits the buyers with e-mail identities to send and receive the online payments from the parties who are interested in these items. This adds to the security, convenience and cost effectiveness of the site. This is an online location for trading and because of the nature of the medium it permits continuous trading online from all over the world. This is a medium which is pre-arranged in a very topical manner. This makes it easier for the people to locate whatever they want to check on. It only requires a certain amount of human intuition to be able to use the medium. It should be remembered that Internet is available 24 hours a day for all the 7 days a week. Throughout the week it is only closed for a period of 2 hours for pre-scheduled maintenance. (What is this hot Dot-Com business?)

Anybody from anywhere in the world may buy things from this site as per their personal choice. The medium itself is very cost effective and highly efficient. EBay employs as many as 2,400 people which are a number bigger than most companies in the dot com world. It has also become a highly profitable company with a total profit of $129 million in 2001 based on a turnover of $740 million. This has boosted up the price of the shares to result in a price to earnings ratio of 143. The market capitalization of EBay is very high and more than the total capitalization of K-Mart combined with Sears. In itself, it is still in the expansion stage. It is tying up with companies like Home Depot so that the sites available to it can be more effectively utilized. The commercial experts on capital markets feel that the company has existing potential to grow further and develop. (What is this hot Dot-Com business?)

The idea of a site like EBay is ideal for the holiday season. The rest of the e-commerce world does not seem to be doing too well. The Internet operations of Yahoo do not seem to be making much profit and even Amazon.com is only now turning the corner in spite of the entire hullabaloo that is associated with it. Jeff Bezos, who is now a director of Amazon.com and Tim Koogle, who is now a director of Yahoo, are on record as having praised EBay as a dream which has come true for the Internet world. EBay has taken up a business model that has worked and the profits are continuously increasing. The profits for the third quarter during 2002 were 24% higher than the results achieved in 2001. The turnover is also increasing very rapidly. In 2001, even the great terrorist attacks on 9/11 pushed down the sales only for a period of two weeks, after which the sales recovered. In every quarter, there has been increasing sales, and the fourth quarter is the best of all. This is due to the holidays and the gifts which are given in this period.

Ultimately, it was decided by EBay that they will buy out the stock of Pay Pal for a total consideration of $1.5 billion. This had given rise to a controversy regarding the price that was fixed. It is true that these companies have a lot of common areas of operation amongst themselves and that is not present in any of the other mergers that went on at about the same time like the one of AOL Time Warner. There it was a merger of the organization providing the content with the user of the content. The result was obvious for everyone to see - a loss of $54.2 billion in the quarterly operation. (What Is PayPal Really Worth to eBay?) One of the reasons for that may have been that the two companies had hardly dealt with each other prior to the merger. This was not true for the two units of Pay Pal and EBay. It was known that Pay Pal had handled a lot of transactions for EBay. This led the AMR Research analyst Louis Columbus to conclude that for majority of the eBay customers, Pay Pal has been the de facto company, and hence eBay was having a lesser risk when buying them. This led him to believe that the price paid was fair, but a higher price was still felt by him to have been undesirable. In certain ways the purchase has been helping EBay. It had started its own system of billing and cash collection called the Billpoint system. It is now possible to phase out this system as a better and more proven system is now available to EBay. In addition, now EBay will get a profit from all the transactions that are processed through Pay Pal. The valuation of each share of Pay Pal has been made s equivalent to 0.39 shares of EBay. (What Is PayPal Really Worth to eBay?)

The economy is now dropping and the increase in the activity of mergers and acquisitions is partly due to this. Some analysts have said that the deal between AOL and Time Warner could be viewed in some respects to be a speculative deal, though on the surface it looked like a good deal. In the case of EBay and Pay Pal, it was felt that both these units had been operating independently earlier and making profits. The activities were also not directly related, but could be tied up while still leaving open other channels for making payments. It was felt by some analysts that the EBay customers had preferred to deal for the small transactions through Pay Pal. This had been the existing choice for quite a few years. Other analysts were not so happy. Sam Prescott is the strategic analyst at Frost and Sullivan. He felt that the valuation of the shares of Pay Pal at $1.5 billion was far too high. (What Is PayPal Really Worth to eBay?)

This also had seemed to be the market's view - at least, in terms of money. The Friday before the merger, the price of EBay shares were at $60.55. On the previously discussed basis, this values a Pay Pal share at $23.61. On the other hand, the price in the market of the share was only $20. David Kathman who was the analyst for Morningstar.com agreed that both the companies are excellent as companies, but that does not mean that they can meet any dreams the investors may have. The valuation at $1.5 billion was felt by him also to be too high. He said that it was not a bad price, especially in view of the fact that the share price of Pay Pal had been rising continuously since the deal was announced. When you look at the figure itself it is still very high. The first quarter revenue of Pay Pal before the merger was $49 million, and that made the figure of $1.5 billion about 7.7 times the annual revenue. In terms of price to earnings ration this is a forward ration of about 60. This just means that it will be quite a few years before the growth in sales and revenue is able to match up with the figure of $1.5 billion. The entire exercise was felt by him to be very optimistic. (What Is PayPal Really Worth to eBay?)

From the side of the Pay Pal share holders there had been no objections to the merger with EBay and it was approved by them on the scheduled date without any major hitches. Of course there had been legal problems that had cropped up but the share holders of Pay Pal did not seem to care much for that. Pay Pal had a total of 61.6 million shares at the time of merger on October 3, 2002 and the majority was voted in favor of the merger. The meeting was however not very well populated. The approved deal gave EBay control of Pay Pal which was then one of the largest organizations on the Internet for online payment between individuals and businesses. The people who had built up this system were due to collect about $600 million after the deal was closed. For EBay, it was expected that the profits would increase, as roughly 67% of the revenues collected by Pay Pal were coming from the fees due to the business generated by dealing regarding the sales and purchase on EBay. (Pay Pal shareholders approve eBay merger)

According to the claims of Pay Pal, it has some 20 million people who are registered to use the service and of them some 3.7 million are businesses. Over the last 3 years, the company claims to have moved some $10 billion on the Internet business. As mentioned earlier, the merger agreement that was announced in July agreed to give 0.39 shares of EBay for each share of Pay Pal. The value of each share of Pay Pal was thus fixed at $23.61 as on the day of announcement. This was then viewed to be about a premium of 18% above the market value of the shares of Pay Pal before the announcement of the deal. The announcement of the deal seems to have badly affected the share price for EBay, and that seemed to be going down continuously, and reached a value of $53.30 on the day before the merger. Correspondingly, the price of Pay Pal shares also had been going down and that reached $20.75 on the closing of the day before the merger. Thus it seems clear that the valuation of the shares were done in a rather optimistic manner when the merger was announced. (Pay Pal shareholders approve eBay merger)

The deal still gives a lot of money to some Pay Pal executives and officers. The former CEO of Pay Pal, Elon R. Musk is to receive $148 million worth of EBay stock, and Michael Moritz is to collect $111 million. The present CEO Peter A. Thiel is scheduled to collect approximately 458 million and another executive, Max R. Levchin nearly $36 million. These large payouts had led to different lawsuits being filed by six different shareholders in Delaware and California. These were trying to halt the merger. They had stated that they felt the EBay offer was too low, and it should be revised upwards. The more serious case has been filed against Pay Pal by Bank One Corp. In Delaware. They are the third biggest in the country as credit card companies and they claimed on September 6th that their patents had been infringed by Pay Pal through their electronic payment system. The merger has of course put the Billpoint system in EBay in jeopardy, as already mentioned. This is likely to be closed down. (Pay Pal shareholders approve eBay merger)

Experts have felt that these legal cases were only a reflection of the popularity of online business. In a period of less than 3 years for 1999, Pay Pal has managed to collect 18 million members. From the side of banks, Pay Pal is viewed as a threat to the many billions of dollars the banks collect as interest and fees. This is from the users of credit cards and from the merchants. This has led to the case launched by Bank One Corp. They have claimed that the methods used by Pay Pal are a violation of their patents on "Cardless Payment System." This particular method permits people to go through with financial transactions without their account information. This suit was filed on September 6th, and claims "irreparable harm." Pay Pal has stated that there are no patent violations, but has accepted that there may be some grounds for litigation in the area of intellectual property over the core technology. (Pay Pal sued as eBay merger vote approaches)

As per the agreement between EBay and Pay Pal, this sort of cases would now have to be taken over by EBay, as it is over the Internet payment systems. The other sets of suits filed by the shareholders have called the offer of EBay for the Pay Pal shares as very low. The logic behind their argument is that transactions on EBay amount to 67% of the business of Pay Pal and this compels Pay Pal to sell out at an inadequate price. On both these cases there have been no direct responses from the companies. The problem is viewed as one of not losing the case, but one of the legal bills that will keep mounting up because of such cases. When the merger was decided, there was no expectation of such cases. Yet, the merger has provided for better defense as it is expected that EBay has more funds for fighting cases that Pay Pal had. (Pay Pal sued as eBay merger vote approaches)

It seems that were some plans behind the filing of these cases as they were filed within a very short time of the announcement of the merger. The dispute in the shareholder's cases spring from the concept of whether they are getting an adequate compensation for their shares or not. They have stated that the 18% premium that the companies say they are giving is inadequate, and should have been nearer 38% as is apparently the norm when the merger is based on stock for stock. However, as seen before, the market prices of both stocks have gone down since the announcement of the merger, and it is possible that the valuation taken for the merger was still too high. (Pay Pal sued as eBay merger vote approaches)

The legal problems throw an entirely new light on the entire deal, and it may be reasonably said that the merged company will be better able to stand up to the onslaught of these cases. This will now be a more stable and better financed company. This has led to the merger being appreciated by some of the analysts in their comments. It certainly removed one risk for the companies - stock prices being driven down by the losses in court. They have even felt that Pay Pal has been following an innovative strategy and this is the reason for its continuous history of being involved in litigation. It should also be accepted that the company has done quite well considering the fact that this is the third business the company has started after failing in their earlier efforts. The company was first named X com Corp and it was involved in accepting deposits from public and even getting loans from certain banks. (Pay Pal sued as eBay merger vote approaches)

Then it had a change of name in 2000. With this the company stooped being a bank and concentrated on the online business. This was through their website and used for only transferring money to e-mail addresses. This led to a position where it became the leading organization in the shifting of funds on the Internet. It had then started getting the lion's share of its revenue from the deals that it made with through EBay. This gave it quite some money, and now EBay is trying to get that money back to itself through this merger. Pay Pal also had some other rather unsavory businesses like online pornography and gambling. This had been noted by the New York Attorney General Eliot Spitzer. This led the state to take it up strongly with the organization and an agreement was reached. The state collected $200,000 and the company stopped the processing of such requests of its members from New York. EBay seems to have higher moral standards, or a more practical outlook. They have stated that they will stop online gambling on the site totally. (Pay Pal sued as eBay merger vote approaches)

There were no problems within Pay Pal when the purchase was decided, and Pay Pal filed all the necessary documents with the Security and Exchange Commission. The date of shareholding fixed for voting on the deal was decided as being August 28th. This was certainly viewed as being a marriage between the dominant online auction company and the dominant online payment service. The Department of Justice had also gone into details of the deal and did not find any legal or regulatory hurdles in the matter. The courts of course had continued looking into the many cases that were going on, as already mentioned, but the objectives of some of those cases was to clearly delay the merger, or block it. These were mainly launched by the shareholders of Pay Pal and not EBay. Regarding the purchase, EBay faced comparatively much less hurdles as the amount involved was much less for it - only about 8% of its outstanding stock. Since this was such a low figure, EBay also did not specifically need a clearance from its shareholders for the merger. There were no replies from the EBay representatives when they were questioned about the merger. Possibly, the news media missed out on some of their expected fun and games with regard to this merger. (Pay Pal has set a date for shareholders to weigh in on its proposed acquisition by eBay)

The problem of fraud on the Internet is a regular feature and fraud on the Internet auctions are still now on the rise. As EBay are the largest auctioneers on the Internet, it also affects them the most. As a result, they have now come with increased anti-fraud protection for some specific and trusted sellers. This program has been given the name of Pay Pal Buyer Protection and gives a free coverage up to $500. The coverage is for goods turning out to be "substantially not as described." This scheme is in addition to the earlier scheme which had coverage of $200 and they required a standard processing fee of $25 per transaction. The old scheme will still continue for items that will not be covered by the new scheme. EBay has been the largest Internet auction site, and naturally the largest number of frauds also takes place here. (EBay Expands Some Fraud Protection)

The number of suspected frauds that were referred to the federal and state authorities is over 48,000 in 2002. This was a three fold increase from the numbers in 2001. Most of these frauds are frauds in auction according to the concerned authorities in the Federal Bureau of Investigation. The new scheme is rather difficult to qualify for. It depends mainly on the reputation of the sellers and they should have had a positive comment in at least 50 dealings from their opposite numbers. Apart from that, they must have had positive feedback in at least 985 of all the transactions they had done on EBay. In addition, the organization must be based in Canada or the United States. The dealings will also have to be done through Pay Pal. The buyers who want this protection must also agree to do the transaction through Pay Pal, and this will be informed to the buyers through special logos. (EBay Expands Some Fraud Protection)