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Who Will Buy eBay?

February 10th, 2008 by Skip McGrath

There is a lot of speculation on Wall Street that eBay could be a takeover target –but who would buy it and why?

In the fall of last year and again this year I both reported and speculated that either eBay and Yahoo would merge or Yahoo would buy eBay.  Boy was I wrong! That Microsoft would acquire Yahoo in a hostile takeover was always a possibility, but I really thought Yahoo would fight this by either merging or buying eBay.  Financially, Yahoo buying eBay never made sense, but a straightforward merger made a lot of sense for a lot of reasons all of which are moot now. (Note: As of Friday, Yahoo rejected Microsoft’s bid, but they seem to be holding out for a higher price so this deal will eventually be done).

But eBay’s low stock price would seem to make it a takeover target but at first glance is its price/earnings ratio at 111 is way to high for any companies to swallow.  But if eBay’s stock continues to fall it could become attractive to more companies. And, what most people miss is that eBay’s forward-looking PE Ratio is closer to 25 when you base it on projected 2008 earnings.

So who could the possible suitors be?

I would rule out Microsoft (Thank God!) because they will have their hands full merging Yahoo’s culture into theirs, and eBay has three distinct cultures –management, buyers and sellers, that they would have to deal with.

The two most obvious candidates are Amazon and Google.  They both have stock prices high enough that they could pay a $10 to $15 a share premium without diluting shareholder value in a major way. Although the issue of merging cultures is always a challenge to any company, I think both Amazon and Google could accomplish it and acquiring eBay would give them both a great addition to their current business.

Let’s look at each one:

Amazon.com (AMZN)

Amazon’s stock is doing very well at $73.50 per share –it has almost doubled in the past year. But Amazon’s total market value is around $30 Billion whereas eBay is currently valued at 37 Billion.  This means it would be difficult for Amazon to acquire eBay but a merger could make a lot of sense giving the combined companies a value of over $67 Billion.  Merging Amazon and eBay makes a lot of sense for several reasons.  First of all it gives Amazon the auction business which is something that never worked out that profitably for them. Next is PayPal –the real moneymaker behind eBay. That is a great fit with Amazon and expands PayPal’s reach in a huge way.  Lastly is the fact that Amazon recently launched a web site hosting business similar to eBay Pro Stores.  Merging those two would make a lot of sense.  Just think of having a store that would give sellers the reach and exposure to eBay, Amazon and the wider internet all in one seamless platform.  This would be a huge attraction to sellers.

Google (GOOG)

Google has both the cash and the market evaluation to acquire eBay outright.  Although I think eBay/Amazon would be a better long-term business fit, there is some real upside for Google as well.  At $516, Google’s stock is off somewhat from its high at $747 it still carries a market valuation of $162 billion. It has zero debt and $14 Billion in the bank. Wall street analysts predict a stock price of over $700 again within one year. This would put Google’s total market valuation over $200 Billion so it could easily swallow eBay.  The upside for Google is that their real value would increase. They would pick up almost $5 Billion in cash and zero debt.

Going Private

Although there are other companies that have the valuation to buy eBay, I can’t really think of any others that make economic or business sense, but there is one other option –Private equity. eBay’s new CEO, John Donahoe, comes from the private equity world.  There are private equity funds and firms that have billions of dollars at their disposal.  What these companies do is buy public companies and take them private by paying off the stockholders.  Then they do things like slim down the workforce and sell off parts of the company to unlock value and make money either selling off the parts or taking the company public again later once it is rebuilt.  As a seller I would hate to see this happen to eBay, but it is a possibility. A private equity firm could sell off Skype, eBay Prostores, some of their recent acquisitions like Kijiji and even PayPal.  This would recover over half the purchase price and then eBay could be taken public again at a nice profit. Although eBay’s seemingly high PE ratio of 111 makes this look like an unattractive option, the forward-looking PE ratio is closer to 25 which makes eBay look cheap for a company that has proven it can grow revenues at a pretty good rate –nothing like the early days, but still respectable by Wall Street standards.

So what will happen? Maybe nothing, who knows, I could be totally wrong… again.  But this year and the nature of the current economy indicates that this will be a growth year for mergers and acquisitions and the Microsoft/Yahoo deal sent shock waves through the market, so I wouldn’t discount any of these possibilities.

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