Stetson University Ebay Inc the Portfolio Decision Business Case Study Please read the instructions carefully and the rubric.
everything you need is attached.
The exam is based on the case “eBay Inc.: The Portfolio Decision” that is uploaded in the “Content” tab on Blackboard. You should use NO OTHER source. You should not do any outside research for the exam [no citation such as footnotes or end notes since you are not allowed to use outside sources]. There is adequate information in the case and the exhibits to answer the questions posed.
The work should be yours. Your submission will be run through SafeAssign (a plagiarism software) and so this should be your own work – the analysis, the wording, the narrative, etc. If SafeAssign indicates plagiarism (using work of other students, using outside sources, etc.), then I will reserve the right to give you a zero for this assignment.
You are limited to a 5-page (double-spaced, 11 font, NO cover page) Word document for this assignment. There will be a substantial penalty for exceeding the page limit.
Your report should answer the following questions (no introduction and conclusion needed; simply start with Q1 and go on from there). A good report will contain the following features:
Arguments that are supported by evidence
Arguments that are linked to concepts and theories learnt in this class
There is evidence of editing and proof reading
Questions
1.What is Elliott Management’s criticism of eBay? Should eBay take this criticism seriously?
2.Is eBay a conglomerate? How has eBay projected itself in the market?
3.Examine eBay’s portfolio of businesses. What role/value does the corporate office play/add?
4.What choices does eBay’s top management have? What should they do?
I have uploaded as a separate document the grading rubric for this assignment. Please see that before you start work on this assignment. eBAY INC.: THE PORTFOLIO DECISION
On January 22, 2019, Devin N. Wenig, the President and CEO of the San Jose, California-based eBay
Inc. received an 18-page letter1 addressed to him and to eBay’s Board of Directors from Jesse Cohn, a
partner at Elliott Management Corporation (Elliott), a New York City-based hedge fund. The letter was
quite critical of the stewardship of the company. More specifically, Cohn indicated that Elliott was
calling for eBay to separate two of its businesses – StubHub and Classifieds – and focus on improving its
legacy Marketplace business that was facing stiff competition from the leading online retailers. Using a
sum-of-the-parts argument2, Cohn’s letter indicated that eBay was underperforming its peers, even while
having an enviable network of 180 million buyers and 25 million sellers.
Wenig reviewed the letter with eBay’s Board chairman, Thomas Tierney. Elliot’s charges echoed those
of another hedge fund, Starboard Value, that six months ago had indicated that they owned about 1
percent of eBay stock and was privately agitating for change3. The two realized that per eBay’s
governance policy, all 15 Board members were up for reelection at the May 30 th, 2019 annual stockholder
meeting4 and that there was every possibility that both Elliott and Starboard Value would put up their own
nominees for Board seats if eBay did not act on the hedge fund’s charges. The leadership team of eBay
had to decide how to respond to the hedge funds’ criticism of the company’s portfolio.
EBAY BACKGROUND
Brief History
After working for a subsidiary of Apple right out of college, Pierre Omidyar started an ecommerce
company called eShop Inc in 19915. Over the Labor Day break in 1995, Omidyar wrote the code for an
interface that brought buyers and sellers together. Omidyar called this site AuctionWeb, and launched it
immediately. Omidyar later went to work for General Magic, a software company, while running
AuctionWeb on the side6. In its first full year of operation, AuctionWeb accounted for a total merchandise
value sold of $7.2 million. Upon reaching this milestone, Omidyar quit his General Magic job to devote
full time to his auction site. He began hiring employees and also a President to run his company 7. The
company sold its one millionth item in mid-1997, roughly two years after its launch 8. At this time,
Omidyar changed the company’s name to eBay. As eBay grew, Omidyar gave up his title of CEO, let go
his erstwhile President and hired Meg Whitman (who had held senior management positions at Procter
1
“Elliott Management Sends Letter to Board of Directors of eBay,” January 22, 2019, MarketWatch, accessed May
9, 2019, https://www.marketwatch.com/press-release/elliott-management-sends-letter-to-board-of-
directors-of-ebay-2019-01-22
2
The sum-of-the-parts valuation “is a process of valuing a company by determining what its aggregate divisions
would be worth if they were spun off or acquired by another company,” Investopedia, “Sum-of-the-parts Valuation
– SOTP Definition, accessed May 13, 2019, https://www.investopedia.com/terms/s/sumofpartsvaluation.asp
3
Cara Lombardo and Laura Stevens, “Activist Investors Urge eBay to Restructure,” January 23, 2019, accessed
May 9, 2019, https://search-proquest-
com.stetson.idm.oclc.org/docview/2169571601/fulltext/D64F3D94651D4D51PQ/1?accountid=2193
4
Schedule 14A Proxy Filing, April 9, 2019, accessed May 9, 2019,
https://d18rn0p25nwr6d.cloudfront.net/CIK-0001065088/b883846d-d4e2-40c8-b210-09b1ecbc77ea.pdf
5
eBay, Inc., “Our History,” accessed May 13, 2019, https://www.ebayinc.com/company/our-history/
6
Ibid.
Ibid.
8
Ibid.
7
2
and Gamble and The Walt Disney Company) as President and CEO9. In the midst of the Internet boom of
the late 1990s, eBay went public via an initial public offering (IPO) in September 199810.
eBay grew both organically and via acquisitions after its IPO. It also began expanding internationally,
starting with Germany, Australia, and the United Kingdom in 1999. As eBay grew, accolades came its
way, such as its inclusion in 2003 in Fortune magazine’s list of fastest growing companies and in 2008 in
Fortune’s “100 Best Companies to Work For.” In 2008, John Donahoe replaced Meg Whitman as CEO.
Following a public battle with activist investor, Carl Icahn and the spin off of PayPal, in 2015 Devin
Wenig became eBay’s fourth CEO11.
Profile
eBay was purely an auction site when it was founded. Omidyar saw it as a site where people could buy
and sell things that would normally be sold in a garage sale or in a flea market. Omidyar envisioned his
site to be a pure marketplace, in that the site would not hold any inventory and would generate income
solely from fees charged to sellers for listing their products and a commission on completed sales. The
first item sold on the site was Omidyar’s used laser pointer. Items listed for sale had a “Place Bid” icon
next to a box for buyers to enter bids12. Auctions were open for a predetermined time period and at the
end of the auction period, the listed item was sold to the highest bidder. A 1998 article identified eBay as
the “world’s leading personal trading community.13” Gradually, sellers began to use the site to list and sell
new (i.e., unused) items. In 2000, eBay acquired half.com, an online retailer14. The acquisition enabled
eBay to launch “Buy It Now” – a fixed price sales format. The two formats – auction and fixed price –
continued to be present on eBay’s site15. In August 2008, eBay announced a change in its fee structure
that emphasized the fixed price format over auctions. A New York Times article gave the rationale for this
move:
“The move is intended to help eBay compete more effectively with Amazon.com and
other big online retailers. The announcement, timed to increase sales during the holiday
shopping season, is just one of the changes eBay has made in the last few months aimed
at reducing its dependence on its auction business, which is growing more slowly than
fixed-price sales. It provides yet more evidence that consumers are losing interest
in auctions now that online shopping sites have become more affordable and easier
to use.16”
9
Ibid.
Ibid.
11
Ibid.
12
Ibid.
13
“eBay’s Popularity Soars Above the Competition: Shoppers Spend More Time on eBay Than Any Other ECommerce Site,” Business Wire, May 9, 1998, p. 1
14
Ibid.
15
Ibid.
16
Laurie J. Flynn, “EBay is Planning to Emphasize Fixed-Price Sales Format Over Its Auction Model,” The New
York Times, August 20, 2008, accessed May 8, 2019,
10
3
In a 2011 interview, then CEO, John Donahoe talked about the transition to fixed price:
“Well, auctions provide price transparency and help items of uncertain value establish
a market price. With the emergence of product search on the internet, that role is no
longer needed, so a lot of the changes I’ve made over the past couple of years have been
to make our marketplace indifferent to format. If a buyer and a seller want to transact in a
fixed-price format, they can. A couple of years ago we saw fixed-price sales surpass
auctions for the first time; I expect the ratio to settle at about 70 percent fixed price and
30 percent auction. But that will require a complete re-architecting of almost every
element of the business system; pricing, incentive and feedback policies, search algorithms,
seller tools and onloading.17”
In 2017, eBay indicated that 88 percent of its gross merchandise value came from fixed price
transactions18. At the beginning of 2019, eBay reported that it had 180 million active buyers19, a seller
network that collectively listed over 1.2 billion items, and a gross merchandise value 20 of $95 billion, 60
percent of which was generated outside the United States.
Portfolio
As a company, eBay consisted of three businesses in 2019: Marketplace (which was the legacy online
interface connecting buyers and sellers), StubHub, and Classifieds. In fiscal 2018, about 80 percent of
total eBay revenues came from Marketplace, and about 10 percent each from StubHub and Classifieds. 21
Marketplace employed 11,000 people and was led by Jay Lee, who reported to CEO, Devin Winig. The
bulk of its revenues came from the take rate percentage that was calculated as net transaction revenues
divided by gross merchandise value. Marketplace increased its take rate from 8.11 percent in 2016 to 8.25
percent in 2018. Ever since its emphasis on fixed rate transactions, eBay competed with leading online
retailers such as Amazon, Alibaba, and Walmart.com22.
StubHub was an online secondary (i.e., resale) ticket platform that eBay acquired in January 2007 for
$310 million. In 2019 StubHub was the world’s largest ticket marketplace that enabled buyers and sellers
to transact tickets for over 10 million live sports, music, and theatre events in more than 40 countries. It
17
Adi Ignatius, “How eBay Developed a Culture of Experimentation,” Harvard Business Review, March 2011, pp.
92-97.
18
Reported in eCommerce Bytes, December 1, 2017,
https://www.ecommercebytes.com/C/letters/blog.pl?/pl/2017/12/1512179179.html
19
eBay defined an active buyer as “a buyer who successfully closed a transaction on our Marketplace or StubHub
platforms within the previous 12-month period” (2018 10-K, page )
20
eBay defined gross merchandise value (GMV) as “the total value of all successfully closed transactions between
users on our Marketplace and StubHub platforms during the applicable period regardless of whether the buyer and
seller actually consummated the transaction (2018 10-K, page)
21
eBay Inc., 2018 10-K, accessed 20th May, 2019,
https://ebay.q4cdn.com/610426115/files/doc_financials/financials/2018/annual/2018_eBay_Annual_Repo
rt.pdf,
22
Ibid.
4
was the official fan-to-fan ticket exchange platform for a variety of professional leagues such as Major
League Baseball and the National Football League23. StubHub’s business model was similar to that of
Marketplace, in that, the key driver of both businesses was the network of buyers and sellers and the
growth of gross merchandise value that drove revenues. StubHub’s take rate was significantly higher than
that of Marketplace. Its take rate increased from 21.77 percent in 2016 to 22.48 percent in 2018 24.
StubHub employed 1,540 people in its San Francisco headquarters and was led by Sukhinder Singh
Cassidy, who reported directly to the CEO. While StubHub was the market leader in the secondary
tickets market, it competed with a number of smaller players such as Vivid Seats, SeatGeek, Razorgator,
and Ticket Liquidator25.
eBay’s Classifieds business (headquartered in Amsterdam, The Netherlands) was the online version of the
classifieds section found in local newspapers. It connected buyers and sellers in local communities.
eBay’s Classifieds business grew both organically (e.g., Kijiji in Canada and Italy) and via acquisitions
(e.g., Bilbasen in Denmark). The various sites that combined to form the Classifieds business operated
under their own name, such as Gumtree in the U.K. and alaMaula in Argentina. Classifieds’ revenues
came entirely from advertising, in that it did not charge any transaction fees. Classifieds employed around
a 1,000 people and was led by Alessandro Coppo, who, like StubHub’s Cassidy, reported directly to
CEO, Wenig. Operating in over 1,000 cities worldwide, Classifieds competed with both local newspapers
and a variety of online sites. Even after changing Kijiji’s name to “eBay Classifieds” in the U.S., the U.S.
site was lagging behind Craigslist, the market leader. However, eBay indicated that its Classified site was
the leading player in many of its non-U.S. markets26. Exhibit 1 profiles eBay’s portfolio businesses.
Portfolio Management
Over the course of its corporate history, eBay had made a number of acquisitions (e.g., StubHub) as well
as a number of divestments. Former CEO, John Donahoe talked about eBay’s rationale for acquisitions in
a 2011 interview:
“We think about acquisitions in three categories: acquisitions to strengthen our core,
adjacent acquisitions, and capability acquisitions. The easiest are the first kind, like
the acquisition two years ago of [the Korean auction site] Gmarket. We’re letting
adjacent acquisitions, such as StubHub and Bill Me Later, run relatively independently.
With Bill Me Later we’ve integrated core capabilities into PayPal and eBay. Positronic,
a small search company, is in the third category. In many cases we’re buying the people
…. Which helps us integrate faster and acquire great talent.27”
Three key divestments shaped its 2019 portfolio:
23
24
25
26
Ibid.
Ibid.
https://www.investopedia.com/articles/company-insights/090816/stubhubs-top-4-competitors.asp
Op. Cit. eBay, 2018 10-K.
27
Adi Ignatius, “How eBay Developed a Culture of Experimentation,” Harvard Business Review, March 2011, pp.
92-97.
5
Skype
Skype, an internet-based telecommunications application, was acquired by eBay in 2005 for $4.1 billion
when Meg Whitman was the company’s CEO28. The rationale for the acquisition was that Skype would
enable eBay’s buyers and sellers to communicate with each other. When John Donohoe succeeded
Whitman in 2008, the decision was made to divest Skype. Donohoe provided the rationale:
“Skype is an enormously successful way to connect people, but not through commerce.
When I became CEO, I felt it was really important to focus – that you can’t compete and
succeed on multiple fronts. Skype was a fantastic business, but it didn’t have synergy with
eBay and PayPal, so I made the decision early in my tenure to divest it.29”
eBay sold 70 percent of Skype to an investor group in 2009 and the remaining to Microsoft in 2011 when
the latter acquired Skype outright for a total value of $4.4 billion30.
PayPal
PayPal was an online payments system that enabled the movement of money from payer to payee. eBay
acquired PayPal in 2002 for $1.5 billion.31 The company’s rationale for the acquisition was that eBay
could grow PayPal’s transactions significantly by making it the company’s in-house payment option.. On
January 17, 2014, Carl Icahn, a leading hedge fund manager, publicized his activist campaign to seek a
split of PayPal and eBay. He captured his rationale as:
“PayPal’s a jewel, and eBay is covering up its value.32”
Elon Musk, a co-founder of PayPal offered his own take on eBay’s ownership of PayPal:
“It doesn’t make sense that a global payment system is a subsidiary of an auction
website – it’s as if Target owned Visa or something.33”
In September 2014, eBay announced that they were spinning off PayPal into an independent company 34.
PayPal began trading on the NASDAQ stock exchange as an independent company in July 2015. An
eBay shareholder owning one share of the company received a share of PayPal. At its IPO, PayPal’s
market capitalization was $47 billion35.
28
eBay, “Our History,” accessed May 21, 2019, https://www.ebayinc.com/company/our-history/
Ibid.
30
Ibid.
31
Ibid.
32
Cited in Steven Bertoni, “EBay and PayPal to Split: Carl Icahn and Elon Musk Wish Comes True,” Forbes,
September 30, 2014, accessed April 11, 2019, https://www.forbes.com/sites/stevenbertoni/2014/09/30/ebay-andpaypal-to-split-carl-icahn-and-elon-musk-wish-comes-true/#7aae4a941d9a
33
Ibid.
34
“eBay: The Positives and the Negatives of the PayPal Spin-Off,” Seeking Alpha, September 30, 2014, accessed
May 21, 2019, https://seekingalpha.com/article/2531765-ebay-the-positives-and-the-negatives-of-the-paypal-spinoff
35
Crunchbase, accessed May 22, 2019, https://www.crunchbase.com/ipo/paypal-ipo–9aae00d7#section-details
29
6
eBay Enterprise
In June 2011, eBay paid $2.4 billion to acquire GSI Commerce and renamed it as “eBay Enterprise. 36”
The newly acquired unit managed e-commerce activities for large and medium-sized retailers such as
Abercrombie & Fitch and Zales. eBay Enterprise provided inventory management, risk mitigation, and
fraud protection to its clients’ e-commerce operations, or as the unit’s head put it, “We help you drive the
best consumer experience after the click.” eBay Enterprise was headquartered in Pennsylvania and at the
time of its acquisition eBay announced that the new unit would operate as a separate business reporting
directly to the CEO37.
As a part of Carl Icahn’s activism that resulted in the spin-off of PayPal, eBay announced that it was
seeking to divest eBay Enterprise so that it could better focus on its core Marketplace business. In July
2015, eBay announced the sale of eBay Enterprise to a group of private investors for $925 million38. An
analyst commented on the sale:
“eBay has succeeded in finding a resolution for Enterprise before the spinoff, something
it has talked about since January, but the deal isn’t exactly a win. eBay acquired Enterprise,
formerly known as GSI Commerce, for $2.4 billion — or almost three times the current sale
price — in 2011. At the time, eBay spun off the majority or entire stakes of parts of GSI,
including flash sale site Rue La La and the online sports retailer Fanatics. What it was left
with was a business that sells e-commerce and logistics services to midsize and large
retailers. While parts of the business like the Magento software platform still hold promise,
the business also faces challenges as some big long-term clients such as Toys “R” Us
decide to leave the GSI platform39.”
eBay did not break out performance at the individual business level in its Securities and Exchanges (SEC)
disclosures. The only breakdown it provided was the net revenue for each business and the take rate for
StubHub and Marketplace. All expenses and profits were disclosed at the corporate level. The corporate
office team size was approximately 12040. Exhibit 2 contains eBay’s summary financial statements.
36
Op. Cit. “Our History.”
“eBay Inc. to Acquire GSI Commerce,” Business Wire, March 28, 2011, accessed May 22, 2019,
https://www.businesswire.com/news/home/20110328006021/en/eBay-Acquire-GSI-Commerce
38
https://www.ebayinc.com/stories/news/ebay-inc-completes-sale-of-ebay-enterprise/, accessed May 22, 2019.
39
Jason Del Ray, “eBay Will Sell Enterprise Unit for $925 Million as PayPal Spinoff Nears,” Recode, July 16, 2015,
accessed April 29, 2019, https://www.recode.net/2015/7/16/11614768/ebay-will-sell-enterprise-unit-for37
925-million-as-paypal-spinoff-nears
Hoover’s Company Records, accessed May 13, 2019, https://search-proquestcom.stetson.idm.oclc.org/marketresearch/docview/1860787118/fulltextPDF/44DCAE8853344D94PQ/1?
accountid=2193
40
7
Portfolio Performance
In its proxy statement, eBay compared itself with three indices: NASDAQ Composite Index, S&P 500
Index, and S&P 500 Informational Technology Index41. Exhibits 3a and 3b show eBay’s stock
performance compared to its peers.
ELLIOTT MANAGEMENT’S THESIS
Elliott Management Corporation, a New York City-based hedge fund with around $34 billion in assets 42
used a three-question checklist in its activism campaigns: Is the company undervalued? Can it be fixed?
Can the fund convince other shareholders of the need for change?43 Elliott sent an 18-page letter44 on
January 22, 2019 to the Board of Directors of eBay. The fund indicated that they owned around 4 percent
of eBay’s shares with a market value of $1.4 billion. While parts of the letter focused on the need for
better execution of eBay’s strategic plan, Elliott’s thesis on improving eBay as a company centered on the
company’s portfolio of businesses. Elliott argued that the real value of StubHub and the Classifieds
business was not fully reflected in eBay’s stock price and that only a spin-off or a complete divestment of
these businesses would benefit eBay’s stockholders. In a plan that Elli…
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