EBay to Acquire Online Payment Service PayPal

EBay Inc. widened its rule over the Internet auction world Monday with an agreement to acquire online payment service PayPal Inc. in a $1.5-billion stock swap reminiscent of the headiest days of the dot-com boom.

EBay Chief Executive Meg Whitman said the deal was expected to close by the end of the year. The deal would give PayPal stockholders 0.39 share of EBay stock for every PayPal share, valuing PayPal at $21.93 a share at Monday’s closing prices.

EBay also announced that results for the latest quarter would exceed forecasts. The firm expects to report second-quarter earnings of 19 cents a share on revenue of about $266 million this month, compared with its earlier forecast of 17 cents on revenue of $260 million to $265 million.

Shares of San Jose-based EBay fell $4.31 to $56.24 and those of Mountain View, Calif.-based PayPal closed up $1.61 at $21.61; both trade on Nasdaq.

PayPal acts as a middleman for transactions, allowing online buyers and sellers to use credit cards even if the seller is not an authorized credit card merchant.

EBay has been profitable every quarter since going public in September 1998, but its own payment system, Payments by Billpoint, was never as successful as PayPal.

“EBay recognized in PayPal something it might have taken them years to build on their own,” said Christopher Penny, an analyst for Friedman Billings Ramsey. “They might have gotten there on their own, but they had the money, so why not buy it?”

Billpoint had been losing $10 million to $15 million a year, EBay executives said. PayPal--which went public in February--reported profit of $1.2 million in the first quarter this year.

Billpoint would shutter when the sale closes. It was acquired by EBay in June 1999 for $86 million.

EBay transactions account for about 60% of PayPal’s business. The payment company, which would remain a separate operation, would give up a much smaller source of revenue, online gambling sites. About 8% of its revenue comes from online gaming transactions, according to PayPal’s quarterly earnings report.

“It’s a trade-off,” said Carrie Johnson, a retail analyst with Forrester Research. “Now that PayPal is aligned with a more legitimate company, they will make up that income in other areas. And not being in gaming makes it seem more secure for the general consumer.”

But PayPal suffers from complaints about its customer service. Users knock long waits on hold and accounts being frozen unnecessarily during security checks.

“I know personally that waiting times can be as long as 45 minutes,” Penny said.

The frozen accounts spawned three class-action suits. No trial dates have been set.

EBay executives declined to say how the customer service problems might be eased.

PayPal also ran into friction with banks and major credit card companies. This year MasterCard said it wanted to examine third-party electronic transactions more carefully for possible fraud. That situation was probably eased, Penny said, with the announcement in June that Wells Fargo & Co. would process PayPal’s credit card transactions. “Wells Fargo and MasterCard have a close relationship,” he said.

Before PayPal was introduced in October 1999, the majority of payments on EBay were by checks or money orders sent through the mail. Now 60% of EBay deals are made via PayPal or Billpoint. The services charge sellers a percentage of the transaction as a fee.

PayPal had a strategy to help build its subscriber base. When buyers paid through the service, PayPal sent e-mail to sellers notifying them that the money was ready to be put into their accounts. All they had to do was register.

“It was quite brilliant,” said EBay Chief Financial Officer Rajiv Eutta. “The whole concept built them fast.”

By the time Billpoint premiered in March 2000, PayPal had a substantial subscriber base.

“This was one area where the first-mover advantage really paid off,” Johnson said.

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Bloomberg News was used in compiling this report.