Questions linger about eBay's bid for PayPal

Monday, July 22nd 2002, 12:00 am

By: News On 6

SAN FRANCISCO (AP) _ With its profits and customers still rising at a healthy clip, PayPal Inc. could have plenty to boast about Tuesday when the online payment provider announces its second-quarter results.

But one second-quarter statistic might prove nettlesome to Mountain View-based PayPal now that its board has accepted a $1.4 billion takeover bid from online auction site eBay.

During the second quarter, the average closing price of PayPal's shares on the Nasdaq Stock Market was$23.85 _ slightly higher than the $23.61-per-share offer that the company accepted from San Jose-based eBay on July 7.

The proposed eBay sale has inspired a variety of theories _ and several lawsuits _ revolving around why PayPal agreed to a relatively modest price amid so much optimism about the company's prospects.

In the second quarter, several stock analysts had appraised PayPal's value at more than $30 per share. PayPal's stock even briefly topped that threshold, hitting $30.48 just five weeks before the eBay deal was announced.

``It's fair to say that a lot of us thought there was considerably more upside to the stock,'' said JMP Securities analyst David Scharf, who had appraised PayPal's value at $32 per share.

Some analysts think PayPal agreed to eBay's offer because its board realized it had to become part of a bigger company to handle all the insider selling likely to occur later this year.

Others said PayPal may have realized that if it spurned eBay's advances it would face stiffer competition from an Internet powerhouse that could afford to pour more money into developing its own online payment service.

``If they got into a battle with eBay, it would have been bloody,'' said industry analyst John Kraft of D.A. Davidson. ``Selling to eBay may have just been the easy way out.''

Misgivings about the sales price have provoked at least four shareholder suits alleging eBay bullied PayPal into accepting its offer.

The civil complaints, filed in Delaware and San Jose, are based on the theory that eBay effectively controlled PayPal because sales completed on its popular auction site accounted for roughly two-thirds of PayPal's business. PayPal's dependence on the auction site gave eBay the leverage to pressure the online payment service to sell out at a bargain price, the suits allege.

Both eBay and PayPal say the claims raised in the suits are baseless.

PayPal's sales price continues to fluctuate because the company is being paid in eBay stock, which changes daily. Based on Friday's closing price, the value of eBay's bid for PayPal had dipped to $23.22 per share.

When they announced the sales agreement, the two companies emphasized the initial price was 18 percent above PayPal's last closing price of $20 per share before the disclosure. EBay and PayPal officials remain convinced the deal is good for both sides.

``I absolutely do think the price was fair,'' said Rajiv Dutta, eBay's chief financial officer. ``It is absolutely true we get a very popular payment service that makes trading easier, faster and safer ... (but) they get to grow their business in a way they couldn't grow as a standalone company.''

PayPal believes the deal is the best thing for its customers as well as its shareholders, said company spokesman Vince Sollitto. The company's trading price during the second quarter isn't significant, Sollitto said, because the sales negotiations didn't become serious until the July 4 holiday weekend when PayPal's shares had fallen. ``We think this is a fair value for the company,'' Sollitto said.

The sales price represents a discount from where PayPal's stock had traded for nearly two-thirds of the second quarter, according to an analysis by The Associated Press.

PayPal's stock closed above the proposed $23.61 sales price on 41 of the 64 days that the company's shares traded on the Nasdaq Stock Market during the three months ended in June.

Investors became particularly bullish on PayPal's shares after the company announced its first-ever quarterly profit April 17 and management provided a rosy forecast for the rest of this year.

At that time, PayPal's management acknowledged that the company might eventually be sold to eBay, but only at the right price.

``Paypal ... is a standalone business that makes sense,'' said Peter Thiel, PayPal's chief executive officer, during an April 17 conference call. ``In the end, we always will do what makes the most sense for the company's shareholders.''

Following those remarks, PayPal's shares closed below $23.61 on just one time _ on May 15 _ during the next 40 trading sessions. The stock began a steady decline after a group of company insiders filed June 12 plans to sell 6 million shares of their stock.

The news of the insider sales _ completed June 27 at $19 per share _ sparked investor concerns that the insiders had become bearish about PayPal's prospects.

PayPal's stock figured to face even more pressure in August when venture capitalists who own huge stakes in the company would be allowed to sell their shares for the first time. Even more insiders shares could have been sold in November.

The likelihood that the venture capitalists, including several board members, would sell large stakes is probably one of the reasons PayPal realized it should accept eBay's offer, said industry analyst Christopher Penny of Friedman, Billings, Ramsey.

All told, PayPal's board, management and other key employees owns 25.3 million shares _ about 41 percent of the company's stock. If the sale goes through, they will receive 9.87 million shares of eBay stock.

EBay can more easily support a wave of insider selling because it has 285.4 million outstanding shares _ nearly five times more than PayPal.

More insider selling at PayPal ``would have hammered the stock,'' Penny said. ``PayPal probably realized it couldn't demand a premium and eBay realized it couldn't demand a discount, so they worked out something amicably.''