How An Independent PayPal Creates Great Prospects For Payments And Long-Term Value

Today, eBay Inc. CEO John Donahoe announced that he has hired a new leader for PayPal, Dan Schulman, and that the company will separate its PayPal and eBay payments and commerce businesses into standalone enterprises in the second of 2015 (Read the announcement here). This is a strong decision by John and eBay’s board: It opens a great deal of strategic optionality for eBay and PayPal as separate companies.

My view here may come as a surprise to some.

In February, when activist investor Carl Icahn was lobbying hard for a fast PayPal sale that would deliver a premium to eBay stockholders, I argued against a speculator’s mindset. For me, the question should rarely be about the fast premiums that can be had in the short term. Instead, it’s almost always about how you build products, services, and companies that endure over time and deliver compounding value to users, shareholders, and society at large.

At the time, both John Donahoe and PayPal’s then-president, David Marcus, said that they had considered the option of separating PayPal and eBay. But ultimately they decided that it made more sense to keep the two companies together. Indeed, separating PayPal was not a new idea. And John made it clear that separation was a question he and the board regularly evaluated.

While there are many factors that help a company create long-term value, a strong leadership team with a long-range vision for the company is one of the most important. And key strategic decisions – decisions that will affect a company’s fortunes for years and even decades to come – have to be made by the leaders who are crafting and executing that company’s long-term plan, not outsiders seeking premiums on stock trades.

In addition, when market conditions start changing, you can’t just jump without figuring out where you plan to land. The close relationship between eBay and PayPal has delivered proven benefits over time. A separation will create new optionalities, as I suggested above, but those new optionalities shouldn’t come at the expense of the time-tested benefits of alliance. To preserve those benefits, a detailed vision and plan for the two companies would be needed before seriously pursuing a new direction.

And now, eBay and PayPal have done that work. They have a plan to pursue this separation in a deliberate way, and I think there are three reasons that it makes sense.

1. Increasing optionality

The payments platform competitive space is evolving quickly. For more and more consumers, their phones, rather than their PCs, are the point of sale. Apple Pay is scheduled to launch any day now. Google continues to expand Google Wallet. In the wake of Alibaba’s hugely successful IPO earlier this month, it is well situated for fast global expansion. Then, you have hard-driving private companies like Square, Stripe, and others. And these are just a few current forces signaling significant change in payments in the years to come. As an independent company, PayPal will have the strategic focus, agility, and flexibility that is needed to capitalize on opportunities and pursue partnerships, investments, and acquisitions in a rapidly evolving environment. Such strategic optionality may be key to long-term value.

2. The importance of leadership

In June, David Marcus left PayPal to take a job at Facebook. John Donahoe had to find a capable executive to replace him, and he had to do it in a fast-moving and increasingly competitive environment. Establishing PayPal as an independent company is a smart way to attract serious attention from proven industry leaders like Dan Schulman and other crucial talent.

3. Preserving key synergies while moving forward

The eBay marketplace captures value from having a deeply integrated payments system; the PayPal payments platform benefits from a critical mass of identity, reputation, balances, and transactional volume. Moving forward, both companies want to preserve these synergies. And to do so, they need a well-defined plan will allow them do so. They’ve got that now – while simultaneously giving PayPal a chance to pursue a much broader future. This future should include a more expansive footprint in the entire payments ecosystem, and may also involve expanding into banking, peer-to-peer lending, and other strategic growth areas.

In February, I wrote that “innovation comes from long-term thinking and iterative execution.” Here, we’re seeing that in action, as eBay and PayPal iterate new visions of the future. But even as visions shift in response to changing competitive landscapes, the values underlying the vision should remain the same. A commitment to creating long-term value is every true entrepreneur’s lodestar. Sometimes that means maintaining proven alliances. Sometimes, it means striking out in new directions. In this instance, for the reasons I’ve outlined above, I think that PayPal as a standalone enterprise can deliver potential massive long-term value.