Summary

Over the years, eBay has been the subject of much activist attention owing to the lack of performance of its stock relative to that of similar companies, and the wide cross-section of businesses that fall under its umbrella. First, Carl Icahn came in and lobbied the company to spin-off PayPal and other divisions, but exited eBay leaving unfinished business after the management team acquiesced. Elliot Management, led by activist investor Paul Singer, took a position 4 years later and lobbied for yet more focus through another set of spin-offs or sale of divisions. Starboard value then tag-team with Elliot management and re-enforced the sentiments expressed by Paul Singer and Carl Icahn several years earlier. Over time the company has reluctantly followed a subset of the recommendations, and the recent deal struck to pacify investors has come in the form of "passive resistance".

Underperformance And Shareholder Activism

For the better part of 8 years the Stock of eBay languished in the doldrums barely breaking above US$40 per share in mid 2018 before heading back down to the US$30s. The meagre move in the stock price was accompanied by dismal growth and profitability metrics, consisting of revenues growing by less than peers (5%), and adjusted operating profit margins (33%) that were volatile and also less than peers. Of course, in a world where investors are constantly on the hunt for a buck, a business with such characteristics will show up on the radar of investor activists. One such investor - Carl Icahn - took a 3.8% stake in the company in 2014, and through board representation assigned to him shortly after, lobbied for the company to improve margins through cost cuts and increased focus on the core business. Once on the board, Icahn discovered a number of incidences of past director conflict of interests, which he referenced in an open letter to the board of directors:

Marc Andreessen and Scott Cook is value driven for themselves, personally profiting while costing eBay stockholders at least $4 billion... Is it good for PayPal to have a competitor [in reference to cook]  in the board room gaining insights into its operations, product pipeline and proprietary technologies? ..... We believe corporate governance at Ebay is dysfunctional Vote in favor of our precatory proposal in order to send a clear message to the eBay Board that eBay and PayPal must be separated -- NOW".

In pushing his point that the board is dysfunctional and that both companies should separate, Icahn mentioned a deal where, a controlling stake in Skype was given to Andreessen (investor and board member) and Sliver Lake Partners (venture capital firm) for US$1.9Bn and within 18 months the stake was sold to Microsoft for US$8.5Bn, leading to a US$4Bn gain that should have gone to eBay's shareholders. The pressure applied by Carl eventually led to the Spin Off of PayPal in 2015. With PayPal expected to provide the  bigger pay day, and the scaring from a bitter battle with eBay's management, Carl narrowed his focused on PayPal and sold his entire stake in eBay leaving unfinished business on the table.

Fast forward to January 2019 and eBay is in the hot seat yet again. This time activist investors Elliot Management (with a 4% stake) and Starboard Value (with a 1% stake) tagged team and sent an open letter to the board of directors of eBay outlining possible value creation opportunities that could put the stock between $55-$63 per share within a year. In the letter, Elliot Management outlined a wide range of issues, but focused on these 4 problems:

StubHub and eBay’s portfolio of Classifieds properties represent high-value, strategic assets that are worth meaningfully more than the value currently being ascribed to them as part of eBay. In addition to unlocking substantial value, separating these assets would allow eBay’s management team to refocus its efforts solely on the core Marketplace business.
eBay is a mature and highly profitable business that should continue to return substantial capital to shareholders, especially given the significant earnings growth contemplated under the Plan.
eBay’s Marketplace is a strategically valuable asset that has weathered prolonged, self-inflicted mis-execution. Management should turn its singular attention to growing and strengthening Marketplace.

eBay must ensure that it has the right, most experienced talent in place to oversee the portfolio review and operational improvements. Management buy-in and Board oversight of the Plan will be paramount to its success.

As the battle between activist investor and company reached fever pitch,  the company eventually acquiesced and committed to the following:

  • Paying a quarterly dividend of 14 cents a share beginning in March
  • Return of US$7 billion of capital to shareholders over the next two years.
  • Drive operational improvement.
  • Initiate a strategic review of StubHub, eBay Classifieds Group and possibly others.
  • Add Jesse Cohn of Elliott and Matt Murphy of Marvell Technology to the Board of Directors with the possibility for a third person.
  • Later in the 2019, they announced a transition to a new CEO, after Devin Wenig stepped down as President and CEO.

By November 2019 the company sold StubHub to Viagogo  - a global ticket marketplace for live sport, music and entertainment events - for US$4.05Bn in cash. Of note is the fact that Viagogo's founder and CEO is Eric Baker who is also the co-founder of Stubhub and a former eBay employee who was fired. A new CEO - Jamie Iannone was employed by April 2020.

Sale of eBay Classifieds Group

On July 21, 2020, eBay announced the sale of eBay Classifieds Group to Adevinta for total consideration of US$9.2Bn in the form of US$2.5Bn in cash and about 540Mn Adevinta shares. As part of the deal - Schibsted - the parent company of Adevinta will acquire eBay Classifieds Group’s Denmark assets for US$330Mn on a debt and cash free basis. With the purchase, Adevinta will obtain ownership of brands in the classifieds space across major industrialized markets. Some of the top brands are Mobile.de, Gumtree, Marktplaats, dba, Bilbasen, Kijiji, 2dehands, 2ememain, Vivanuncios, Automobile.it, Motors.co.uk, Autotrader (Australia), Carsguide (Australia), and eBay Kleinanzeigen. According to eBay the combined group will have leading market positions across 20 markets, with 3Bn monthly visits. See investor presentation below taken from Adevinta's website:

What Does This Mean For eBay Shareholders

The deal has been presented well to shareholders as a huge value enhancing play, but as one begins to peel back the layers it appears that the deal is essentially eBay acquiring a stake in a much larger pool of internet based assets, as opposed to breaking free and clear like what it did with Stubhub. First, the purchase consideration was 73% equity which subjects the majority of the value of the classifieds business to the management skill of third parties, with whom the company is unfamiliar. In addition, Adevinta is essentially a private equity/venture capital spin-off from Schibsted (which is an internet conglomerate), a spin-off with little to no operational background into the running of a classifieds business. According to Adevinta's corporate Website:

We take minority stakes in marketplace startups within our core verticals: real estate, cars/mobility and jobs/education. We look for companies with tangible traction, a potential to scale beyond their domestic market, and which we could support with more than financial resources.

Adevinta is a 4 member team of all investment managers with only 4 portfolio companies listed on it website. Undoubtedly, Adevinta will likely facilitate sharing of some corporate overheads for eBay Classifieds Group given that they expect to realize US$150 to US$185 of EBITDA run-rate synergies in 3 years, but how much operational expertise can the head office contribute?

Even more telling is the post-deal governance structure of the consolidated entity. As can be seen in the presentation, eBay will receive a combination of voting and non-voting (class B and A shares) shares totalling 44% of the combined entity, and 2 seats on the board. In terms of votes eBay will end up 33% voting rights. According to eBay's presentation the 44% stake that the company will receive will make the company the largest shareholder of Adevinta. It is not entirely clear how much voting rights the other major shareholders (Schibsted & Stiftelsen) will have, but is clear that in terms of influence eBay will be at least number 2.

In this regard, it appears that eBay is either dragging its feet on the disposition of non-core assets, or actually doing the opposite of what activist investors fought for. It can be argued that the company can slowly dispose of their equity stake in Adevinta later while benefiting from the short term upside in stock, but at the same time they could have pushed for an all cash/significantly more cash deal at a higher price. This would be sensible especially within the context of the uncertainty posed by COVID-19. The parent company of Adevinta (which has a 59% ownership stake) is a large entity with deep pockets and could afford to fund a cash rich deal. Instead of opting for a deal with more cash, which could have been returned to shareholders through stock buybacks, they took a very influential position in a conglomerate, a position that could be converted into a controlling position later. After all Adevinta and its parent have been working towards the removal of the subordinated share structure since 2020, and when this is  removed eBay could end up in a controlling position.

Concluding

If eBay continues along this path they run the risk of continuing to spread management resources thin, at a time when activist investors are less incentivized to continue fighting. It is unlikely that the two persons representing the interest of eBay on the board of Adevinta will be able to oversee US$6.7Bn in value without help from eBay's management team. As at July 2020, the stock price of eBay stood at US$56.59, which more than 100% above the trading price printed when Elliot announced their stake, suggesting that Elliot have probably doubled their money.  In-spite of the changes that has happened thus far the situation is ripe for a continuation of the cycle. But, activist investors are always looking for a buck, so don't be surprised if another 13D is filed in a few years, or even if another round of "fighting" break out between activist investors and the board of the directors of eBay.