eBay CEO: Icahn's call for PayPal spin-off is old news

January 29, 2014: 2:34 PM ET

John Donahoe tells Fortune why spinning off PayPal would hurt -- not help -- the online credit business, how eBay is changing for the better, and whether customers can expect delivery via air drone any time soon.

eBay CEO John Donahoe says the company's same-day shipping could be a ubiquitous service:

"When I first became CEO, I looked at all the options and looked at what was the best future for eBay Inc. ... And at that time, made the determination that eBay and PayPal together could drive greater growth and success," remembers eBay CEO John Donahoe.

FORTUNE -- Ask John Donahoe about Carl Icahn's call for a PayPal spin-off, and he'll offer a veritable shrug.

"We could have come up with those points ourselves," Donahoe told Fortune during a sit-down this Tuesday at PayPal's San Jose, Calif.-based headquarters.

A week ago, eBay (EBAY) announced the activist investor had nominated two of his employees to the e-commerce company's board of directors. More sensational however was Icahn's non-binding proposal to spin-off PayPal into a separate business. Should PayPal, the fastest-growing business segment within eBay, secede?

A few days prior to eBay's earnings report on Jan. 22, Donahoe and Icahn, who had never met before, had a "respectful" back-and-forth exchange on the phone. Icahn explained how a PayPal spin-off would boost shareholder value. Donahoe told him how the board was pursuing a different path and detailed his view why that path was the best alternative.

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But this is not the first time eBay has mulled over a potential PayPal spin-off. When Donahoe became CEO in March 2008, he examined all of eBay's options for the company's long-term growth and success, including making PayPal independent. Explained Donahoe: "At that time, I made the determination that eBay and PayPal together could drive greater growth and success." (He also concluded Skype didn't have readily apparent synergies with those two businesses -- apparently, few customers wanted to actually video chat about their purchases -- which led to Skype's $8.5 billion sale to Microsoft (MSFT) in 2011.)

Wise move. PayPal, which eBay acquired in 2002 to process online transactions for a cool $1.5 billion, has by far proven the company's savviest purchase to date. Of the company's three business divisions – Marketplaces, Enterprises, and Payments – the Payments division, or PayPal, remains the fastest growing, with revenues climbing 19% to $1.8 billion last quarter. Donahoe himself expects PayPal revenues to surpass those of Marketplaces, the auction site, within the next two to four years, and many analysts consider the business eBay's most significant revenue driver.

But while it behooves eBay to keep PayPal in the family, the relationship actually goes two ways. eBay is directly contributing to PayPal's rapid user growth at no cost -- one-third of PayPal's 5.2 million new active accounts for the fourth quarter -- thanks to increasing integration of PayPal in eBay's web and mobile services. And roughly 50% of eBay's profits are being utilized to help fund PayPal's rapid, continued expansion. When eBay officially launched in Russia with a native-language site in 2010, PayPal instantly benefited by being exposed to millions of Russian eBay users. "It allowed PayPal to build on those [existing users] and build a business off of eBay." Which is why, Donahoe emphasizes, the company will hold onto PayPal until such advantages, or "synergies," run their course.

Looking ahead, Donahoe discussed how eBay is becoming a better company inside and out. In December 2012, he chastised employees during an all-hands meeting for not using eBay products enough. ("I see competitors' boxes coming to our mailroom," he said. "You should be using our products and using PayPal products wherever you see them.") The speech resulted in a new, internal process where employees basically report user experience problems directly to key product, employee, or operational managers so an issue can be fixed or improved. Thousands of suggestions and ideas have emerged because of it.

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The company is also investing heavily in the future, including initiatives like the same-day shipping service eBay Now, and plans to do so through 2015 at the expense of profit margins. Donahoe points to the acquisition of Shutl last October as one example. The U.K.-based online marketplace helps connect local couriers with retailers. He says Shutl will help expedite the U.S. expansion that allows eBay to have the scale to reduce costs.

Indeed, same day delivery is an important race, even if it accounts for a minority of eBay user behavior as the company anticipates. Having a myriad of shipping options for the consumer appears key. Amazon (AMZN), eBay's largest competitor in many respects, continues to ramp up delivery options of its own, largely by building out its own infrastructure of fulfillment centers and contemplating some ambitious and futuristic delivery options. Jeff Bezos made headlines last December when he forecast select Amazon packages would be delivered by air drone in the coming years.

So does that mean eBay customers can expect eBay to follow suit and introduce eBay Now Drones?

"No," chuckles Donahoe. "I don't see that in the near future."

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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