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February 27, 2014

The Carl Icahn vs. eBay Showdown

By Garrett Baldwin for Money Morning

On Monday, activist investor Carl Icahn delivered a swift jab at eBay Inc. (Nasdaq: EBAY) leadership in a terse letter questioning the loyalties of certain board members and the competence of Chief Executive Officer (CEO) John Donahoe. 

In a letter to eBay shareholders, Icahn charged eBay leadership with the most "blatant disregard" for accountability that his firm Icahn Enterprises "has ever seen."

The bare-knuckled blame includes charges of pseudo-insider trading, gross mismanagement, and failure to address "conflicts of interests" among board members, while calling, yet again, for a spin-off of eBay's surging PayPal division.

eBay responded on Monday to his letter line by line, defending its leadership. 

The battle is now heating up, as Icahn pushes for the replacement of specific board members.

We've seen this behavior from Icahn in the past. 

As a bullish shareholder, he publicly sparred with hedge fund manager Bill Ackman over the future of Herbalife Ltd. (NYSE: HLF), a battle he has handsomely won as the stock price surged. He called out the board of Apple Inc. (Nasdaq: AAPL) over its glut of cash on hand, pushing for a $50-billion stock buyback. He even had no qualms about taking Dell Inc. (Nasdaq: DELL) private, a move that would have wrestled control of the company away from its founder and CEO Michael Dell, who started the company in 1984 from a college dorm room.

But the new charges against eBay leaders raise a question of whether Icahn has gone too far this time... 

The PayPal Battle Heats Up

Here's the crux of Icahn's position on eBay, his outlook, and his principle concerns about the company:
    "We have recently accumulated a significant position in eBay's common stock because we believe there is great long-term value in the business. However, after diligently researching this company we have discovered multiple lapses in corporate governance. These include certain material conflicts of interest, which we believe could put the future of our company in peril. We have found ourselves in many troubling situations over the years, but the complete disregard for accountability at eBay is the most blatant we have ever seen."
Icahn makes several serious charges, accusing CEO John Donahoe's of "ineptitude" in addressing Icahn's concerns. 

First, Icahn accuses director Scott Cook, a current board member of Intuit Inc. (Nasdaq: INTU), a minor competitor of eBay, of working for the enemy. Icahn believes Cook is interfering in eBay's hiring practices. 

Second, he accuses board member and venture capitalist Marc Andreessen of "routinely funding competitors while buying companies from eBay and reaping significant personal riches." The charge comes in the wake of Andreesen's efforts, as part of an investment group, to purchase 70% of Skype from eBay for $2.75 billion, a figure that was slightly less than what the company paid for it just four years earlier. He charges Andreesen with investing in at least five direct competitors of eBay in the mobile payment and online money management sectors.

In Icahn's mind, both Andreesen and Cook are directly competing against eBay's interests. Writes Icahn: "How can Mr. Andreessen be trusted to objectively advise Mr. Donahoe and the eBay Board about the strategic direction of PayPal when he has vested interest in so many of its competitors?"

eBay defended both board members in their reply, citing the "extraordinary insight, expertise, and leadership" that they bring to the company's board.

The charges are brash. But as an activist investor, Icahn believes it's his job to stand up on behalf of fellow investors against acts of mismanagement by the board and executives (of course, while making a lot of money in the process)...

His forte is focusing on great companies and stocks held back by poor management. This is why critics have accused Icahn of being a corporate raider, drawing comparisons to Gordon Gecko, the fictional tycoon from the 1987 movie "Wall Street." Business Insider even labeled him "The Most Dangerous Man on Wall Street" in March 2013.

So, will he get his way again?

eBay's Reaction to Carl Icahn

Ultimately, Icahn wants eBay to spin off the highly profitable PayPal division that is competing with Amazon, Google, MasterCard, and other financial services companies. 

Icahn's letter doesn't provide much new evidence that wasn't already brought up by gurus in the past. Certainly, his concerns are valid, and a PayPal spin-off would be beneficial in the short term due to the significant premium it would likely draw from investors. So Icahn is using his name and purse to shine a brighter light on the matter and bring it to the front page of every major financial news outlet. 

A PayPal spin-off is likely of PayPal in the future. For the time being, however, eBay seems content in having a diversified business model. eBay leaders believe that PayPal benefits right now from having access to its customers, technology, and financing. In a highly competitive, uncertain, and fast-growing industry, the company may need eBay's resources as it continues to innovate and carve out its share of the digital payment marketplace.

So if recent history is any indicator, we're in store for a long battle between Icahn and eBay leaders.

Courtesy Garrett Baldwin for Money Morning (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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