Why Did eBay Inc Spin Off PayPal? Robert Peck Pondered The Scenario Back In March

On Monday, eBay Inc EBAY announced it will split from PayPal in 2015.

One analyst, SunTrust Robinson Humphrey's Robert Peck, pondered the scenario earlier this spring in a note to investors.

Peck detailed five arguments:

1. "CURRENCY: PayPal will be given it its own currency for hiring & retaining talent, as well as acquisitions."
2. "NEW TOPLINE OPPORTUNITES: PayPal could sign on additional top merchants that are possibly hesitant under eBay ownership (Amazon, Macy’s)?"
3. "BETTER INVESTOR ALIGNMENT TO ASSET: PayPal’s investor profile would more likely seek growth, allowing room for more investments and potential innovation. Investors more focused on growth would support this asset, while investors who are more focused on cash flow could own Marketplaces."
4. "DATA CAN STILL BE SHARED BETWEEN PLATFORMS: It is feasible that data could still be shared with eBay and PayPal under a contractual agreement helping suppress fraud (although possibly more expensive). Further, a partial Spin (20-30%) could retain all of eBay's data sharing and control while still high lighting the value of the PayPal asset (although a contract may still be necessary)."
5. "HISTORY SHOWS ASSET SPINS ARE POSITIVE FOR SHAREHOLDERS: The argument here is that be aligning the appropriate assets with the appropriate capital structures and investor base, that there is more efficiency and that historically spins outperform the market."

Inversely, Peck discussed a few reasons why a spin off could fail. (Again, this was a hypothetical argument earlier this year):

1. "DATA SHARING IS PARAMOUNT: The sharing of data between the two platforms not only helps suppress fraud and losses, but also improves targeting which augments revenue."
2. "MARKETPLACE HELPS DRIVE PAYPAL GROWTH: eBay fuels a portion of PayPal’s growth (~30% of PayPal’s new users are from eBay, which we estimate growing ~15%). Recent expansion in Russia and Germany are indicative. PayPal is able to leverage being eBay’s preferred provider of payments in many geographies and in total PayPal is 78% penetrated on eBay. In addition, the Bill Me Later platform is growing well on eBay, partially funded by eBay cash."
3. "SEPERATING WILL INCREASE COSTS: Since the two units will be separate businesses, costs will increase as compensation must be set up for data sharing and duplicative positions established (i.e., G&A)."
4. "COMPETITION IS COMBINING, NOT SEPERATING, PLATFORMS: The industry trend is to combine marketplaces and payments (i.e., Amazon, Apple, Google, Square). eBay’s balance sheet can support PayPal’s investments (i.e., Braintree acquisition for $800m, opex)."
5. "MANAGEMENT DISTRACTION IN A DELICATE TIME: One of the large arguments we have heard is that the company is in a delicate time – it’s trying to revamp Marketplaces growth and also invest in and expand PayPal while competition is growing. Any distraction to management would be detrimental."

Disclosure: At the time of this writing, the author had no position in the equities mentioned in this report.