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.
MORE: eBay is back!
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.
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."
As it moves further away from auctions, investors wait to see if the company can grow into its e-commerce and mobile payments business.
By Kevin Kelleher, contributor
FORTUNE -- It has not been a terrific year for eBay (EBAY), but more of a middling one. After years of restructuring the company and retooling its offerings, the e-commerce company seems to be hitting something of a soft patch that, while far from derailing MOREKevin Kelleher - Oct 23, 2013 5:00 AM ET
Some say collecting and remitting sales taxes would be too complicated and expensive for smaller businesses. But that doesn't seem to be the case.
FORTUNE -- Taxes on Internet sales have been talked about since the birth of e-commerce. In those early web days, one major objection was that taxes would be impossible to collect, given all the various local and state sales-tax regimes. Forcing merchants to adhere to the laws of MOREDan Mitchell, contributor - May 7, 2013 10:45 AM ET
The e-commerce company has turned itself around. Now it must find more ways to grow.JP Mangalindan, Writer - Apr 18, 2013 11:34 AM ET
Retooled e-commerce giant eBay wants users to take a second look.
By Kevin Kelleher, contributor
FORTUNE -- Analyst day is one of the less exciting rituals in Silicon Valley. It usually involves updating a Powerpoint made for a recent investment conference, appending a question-and-answer session, and waving goodbye to investors as they walk out with the logo-ed tchotchkes destined for a wastebasket.
eBay's (EBAY) analyst day last Thursday, however was a notable exception. MOREApr 2, 2013 7:07 AM ET
John Donahoe tells Fortune that eBay's same-day shipping service could eventually serve everyone in the U.S.
FORTUNE -- Same-day shipping is inevitable, according to eBay CEO John Donahoe.
While eBay's (EBAY) same-day shipping program, eBay Now, may be available in just three U.S. cities -- with another two coming this summer -- Donahoe foresees a day when customers can get thousands of items from partners like Target (TGT), Home Depot (HD), and Urban Outfitters everywhere within MOREJP Mangalindan, Writer - Mar 29, 2013 1:19 PM ET
Supercharged by PayPal, the e-commerce company and its stock are red-hot. Watch out, Amazon!
FORTUNE -- "I'd like to take you on a journey." A group of 2,500 eBay employees is assembled at the San Jose Civic, a concert venue a few miles from company headquarters. Their boss, CEO John Donahoe, is onstage, asking them to reflect on their work. "Close your eyes," he urges in a deep baritone. "What is MOREJP Mangalindan, Writer - Feb 7, 2013 5:00 AM ET
The turnaround the company has been working on for four years is finally bearing fruit -- but investors don't seem convinced yet. Its earnings report this week is a chance to change that.
By Kevin Kelleher, contributor
FORTUNE -- It wasn't the way any CEO wanted to start of a new year. eBay chief John Donahoe learned that Scott Thompson, the head of the company's fast-growing PayPal unit, was leaving to become MOREJan 17, 2012 10:55 AM ET
All you 480 million Skype users out there should be rejoicing today, now that the Internet calling and video service has been freed from the clutches of eBay.
As was announced this morning, eBay is selling a 65% stake in Skype for $1.9 billion in cash to a group of private equity shops and venture capitalists. The deal also includes a loan from eBay of $125 million.
So let's call it $2 billion. That's MOREMichael V. Copeland, Senior Writer - Sep 1, 2009 4:34 PM ET
From Pattie Sellers' Postcards column: Our 10 favorites from the mouths of media moguls, tech titans, Tweeters and more.Tom Ziegler, Senior Editor - Jul 28, 2009 12:51 PM ET
|The medical marijuana ad that never aired, despite contrary media headlines|
|2 million students missing out on college aid|
|GM raising Corvette prices|
|China to fight pollution with drones|
|Boeing reports wing cracks on Dreamliners|