eBay extend online grip by bidding to take over PayPal

If the deal gets stockholder, government and regulatory approval, it will secure the online giant’s overwhelming grip on online transactions, but has raised concerns that customers may face rate increases to use the electronic payments method once eBay phase out their own less successful Billpoint service.

The stock swap will provide 0.39 eBay shares for each share of PayPal. The $1.5bn price tag is based on eBay’s stock value of $60.55 on July 5. PayPal, the Internet’s most popular online payment service, will remain an independent brand.

The company launched in October 1999, five months after eBay purchased Billpoint. But while Billpoint has floundered, losing an estimated $10m to $15m per year, according to a company official, PayPal quickly established itself as the market leader for online payments. In the US, 76 per cent of eBay sellers accept PayPal payments, while only 29 per cent accept Billpoint.

In part, PayPal’s success is attributed to an aggressive marketing campaign. The system was easy to use and it offered a bounty of up to $1000 to members referring new users to the service, giving users an incentive to tell others about it.

In an effort to boost Billpoint, eBay joined forces with Wells Fargo in March 2000 – a partnership that ended in February of this year when eBay bought out Wells Fargo’s interest in Billpoint. Taking the philosophy of “if you can’t beat ’em, join ’em”, eBay then turned their attention to acquiring PayPal.

“This acquisition is all about improving the eBay user experience,” Meg Whitman, president and CEO of eBay, said in a conference call.

Bringing PayPal under the eBay umbrella will make it “easier, safer and faster” for eBay members to conduct business, according to Whitman.

PayPal, which showed its first profit in the first quarter of 2002, charges online sellers a fee that averages just over three per cent of the transaction.

Tremendous growth at the company has led to more than 15.4m PayPal accounts. eBay make up approximately 60 per cent of PayPal’s business, with potential for growth coming from 25m eBay users who have not signed up for the service.

International service has been another key to PayPal’s success.The online payment system is available in 38 countries. The importance of electronic payments was noted by Whitman during the conference call.

About two years ago, practically none of eBay’s business was settled by online payments. Today about 40 per cent of the company’s gross merchandise sales is handled electronically. She foresees boosting that to 60 or 70 per cent.

For eBay sellers, the question is what will happen to PayPal’s rates. “At this time we don’t anticipate any fee changes for the foreseeable future,” eBay’s Kevin Pursglove said. “Those will still be decisions made by PayPal.”

David Steiner, co-founder of AuctionBytes.com, said online sellers are concerned. “They are worried now that eBay has such a firm hold on the payment services that there’s not much they can do about stemming the flow of a rate increase.” However, he suggested there is a level at which a fee increase would price its online payment service out of the market.

Sellers still have other payment services, such as CitiBank’s c2it, as well as the option of opening a merchant account directly with a credit card company. Like many others, Steiner is waiting to see what happens. “I think the jury’s still out,” he said the day the acquisition was announced. “I’m not saying this is necessarily a bad thing for users, eBay acquiring PayPal. We just don’t know.”

• Two PayPal shareholders have launched lawsuits to stop the acquisition. They each filed in Delaware Chancery Court last week on behalf of PayPal shareholders, charging that the deal represents a breach of the companies’ fiduciary duty to those shareholders and that the price eBay agreed to pay for PayPal is unfair and inadequate.
eBay and PayPal were reported to be prepared to challenge the lawsuits. They were dismissive of them, saying that they were without merit.