Ebay Paypal Merger Growth Term Paper

Pages: 15 (5649 words)  ·  Bibliography Sources: ≈ 11  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business

(What is this hot Dot-Com business?)

Anybody from anywhere in the world may buy things from this site as per their personal choice. The medium itself is very cost effective and highly efficient. EBay employs as many as 2,400 people which are a number bigger than most companies in the dot com world. It has also become a highly profitable company with a total profit of $129 million in 2001 based on a turnover of $740 million. This has boosted up the price of the shares to result in a price to earnings ratio of 143. The market capitalization of EBay is very high and more than the total capitalization of K-Mart combined with Sears. In itself, it is still in the expansion stage. It is tying up with companies like Home Depot so that the sites available to it can be more effectively utilized. The commercial experts on capital markets feel that the company has existing potential to grow further and develop. (What is this hot Dot-Com business?)

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The idea of a site like EBay is ideal for the holiday season. The rest of the e-commerce world does not seem to be doing too well. The Internet operations of Yahoo do not seem to be making much profit and even Amazon.com is only now turning the corner in spite of the entire hullabaloo that is associated with it. Jeff Bezos, who is now a director of Amazon.com and Tim Koogle, who is now a director of Yahoo, are on record as having praised EBay as a dream which has come true for the Internet world. EBay has taken up a business model that has worked and the profits are continuously increasing. The profits for the third quarter during 2002 were 24% higher than the results achieved in 2001. The turnover is also increasing very rapidly. In 2001, even the great terrorist attacks on 9/11 pushed down the sales only for a period of two weeks, after which the sales recovered. In every quarter, there has been increasing sales, and the fourth quarter is the best of all. This is due to the holidays and the gifts which are given in this period.

Term Paper on Ebay Paypal Merger Growth in Assignment

Ultimately, it was decided by EBay that they will buy out the stock of Pay Pal for a total consideration of $1.5 billion. This had given rise to a controversy regarding the price that was fixed. It is true that these companies have a lot of common areas of operation amongst themselves and that is not present in any of the other mergers that went on at about the same time like the one of AOL Time Warner. There it was a merger of the organization providing the content with the user of the content. The result was obvious for everyone to see - a loss of $54.2 billion in the quarterly operation. (What Is PayPal Really Worth to eBay?) One of the reasons for that may have been that the two companies had hardly dealt with each other prior to the merger. This was not true for the two units of Pay Pal and EBay. It was known that Pay Pal had handled a lot of transactions for EBay. This led the AMR Research analyst Louis Columbus to conclude that for majority of the eBay customers, Pay Pal has been the de facto company, and hence eBay was having a lesser risk when buying them. This led him to believe that the price paid was fair, but a higher price was still felt by him to have been undesirable. In certain ways the purchase has been helping EBay. It had started its own system of billing and cash collection called the Billpoint system. It is now possible to phase out this system as a better and more proven system is now available to EBay. In addition, now EBay will get a profit from all the transactions that are processed through Pay Pal. The valuation of each share of Pay Pal has been made s equivalent to 0.39 shares of EBay. (What Is PayPal Really Worth to eBay?)

The economy is now dropping and the increase in the activity of mergers and acquisitions is partly due to this. Some analysts have said that the deal between AOL and Time Warner could be viewed in some respects to be a speculative deal, though on the surface it looked like a good deal. In the case of EBay and Pay Pal, it was felt that both these units had been operating independently earlier and making profits. The activities were also not directly related, but could be tied up while still leaving open other channels for making payments. It was felt by some analysts that the EBay customers had preferred to deal for the small transactions through Pay Pal. This had been the existing choice for quite a few years. Other analysts were not so happy. Sam Prescott is the strategic analyst at Frost and Sullivan. He felt that the valuation of the shares of Pay Pal at $1.5 billion was far too high. (What Is PayPal Really Worth to eBay?)

This also had seemed to be the market's view - at least, in terms of money. The Friday before the merger, the price of EBay shares were at $60.55. On the previously discussed basis, this values a Pay Pal share at $23.61. On the other hand, the price in the market of the share was only $20. David Kathman who was the analyst for Morningstar.com agreed that both the companies are excellent as companies, but that does not mean that they can meet any dreams the investors may have. The valuation at $1.5 billion was felt by him also to be too high. He said that it was not a bad price, especially in view of the fact that the share price of Pay Pal had been rising continuously since the deal was announced. When you look at the figure itself it is still very high. The first quarter revenue of Pay Pal before the merger was $49 million, and that made the figure of $1.5 billion about 7.7 times the annual revenue. In terms of price to earnings ration this is a forward ration of about 60. This just means that it will be quite a few years before the growth in sales and revenue is able to match up with the figure of $1.5 billion. The entire exercise was felt by him to be very optimistic. (What Is PayPal Really Worth to eBay?)

From the side of the Pay Pal share holders there had been no objections to the merger with EBay and it was approved by them on the scheduled date without any major hitches. Of course there had been legal problems that had cropped up but the share holders of Pay Pal did not seem to care much for that. Pay Pal had a total of 61.6 million shares at the time of merger on October 3, 2002 and the majority was voted in favor of the merger. The meeting was however not very well populated. The approved deal gave EBay control of Pay Pal which was then one of the largest organizations on the Internet for online payment between individuals and businesses. The people who had built up this system were due to collect about $600 million after the deal was closed. For EBay, it was expected that the profits would increase, as roughly 67% of the revenues collected by Pay Pal were coming from the fees due to the business generated by dealing regarding the sales and purchase on EBay. (Pay Pal shareholders approve eBay merger)

According to the claims of Pay Pal, it has some 20 million people who are registered to use the service and of them some 3.7 million are businesses. Over the last 3 years, the company claims to have moved some $10 billion on the Internet business. As mentioned earlier, the merger agreement that was announced in July agreed to give 0.39 shares of EBay for each share of Pay Pal. The value of each share of Pay Pal was thus fixed at $23.61 as on the day of announcement. This was then viewed to be about a premium of 18% above the market value of the shares of Pay Pal before the announcement of the deal. The announcement of the deal seems to have badly affected the share price for EBay, and that seemed to be going down continuously, and reached a value of $53.30 on the day before the merger. Correspondingly, the price of Pay Pal shares also had been going down and that reached $20.75 on the closing of the day before the merger. Thus it seems clear that the valuation of the shares were done in a rather optimistic manner when the merger was announced. (Pay Pal shareholders approve eBay merger)

The deal still gives a lot of money to some Pay Pal executives and officers.… [END OF PREVIEW] . . . READ MORE

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