July 8, 2002

Associated Press
Brian Bergstein

Online auction giant eBay Inc. is buying Internet payment provider PayPal Inc. in a $1.3 billion stock deal that would unite arguably the Web's most successful business with one of the few companies that has been giving it any trouble.

EBay executives said Monday they hope acquiring PayPal would make the trading site faster, easier and safer and give eBay a significant chunk of e-commerce action it is missing out on.

"It brings together two companies in a way that will benefit our users," eBay's chief executive, Meg Whitman, told financial analysts in a conference call before the stock market opened Monday.

EBay shares then fell $4.31, or 7.1 percent, to close at $56.24 on the Nasdaq Stock Market. PayPal stock jumped $1.61, or more than 8 percent, to $21.61.

In disclosing the PayPal deal, San Jose-based eBay also released its second-quarter earnings early, posting a profit that more than doubled from last year. EBay earned $54.3 million, or 19 cents per share, on revenue of $266 million in the quarter ended June 30. That beat Wall Street forecasts of 17 cents a share, according to Thomson Financial/First Call.

Based in nearby Mountain View, PayPal lets buyers and sellers exchange money via e-mail. Buyers make payments online through credit cards and bank accounts, and PayPal relays the funds to sellers' accounts. Basic usage is free, but sellers who use added features must pay fees based on the amount transferred. About 60 percent of PayPal's business comes from eBay users.

EBay has a similar service of its own, Billpoint, but it was late to the game and generally is not considered as easy to use, leading far more sellers to accept PayPal than Billpoint. As it developed a critical mass of users, PayPal gained a huge advantage much like what eBay enjoys over other Internet auction sites that try to copy the model it invented. "We heard consistently from the largest sellers on eBay to relative novices that PayPal was the preferred mechanism of choice," said Derek Brown, an analyst with W.R. Hambrecht & Co. "With PayPal in the fold, eBay will make it even easier to utilize."

Whitman said that should make eBay "an even more compelling trading platform" because PayPal would greatly speed up the rate of transactions made on eBay.

Even now, 60 percent of the $13 billion in merchandise sold annually on eBay is paid by check or money order, and sellers usually wait for the checks to clear before shipping their items out - a process that can take two weeks. A PayPal transaction can be completed in days.

EBay and PayPal also can merge their billing systems and share insights on detecting fraud. And since PayPal handles payments for other e-commerce sites, eBay would now be able to make money on transactions that don't even happen on its site.

Even so, Whitman said eBay would no longer let PayPal facilitate payments for online gambling sites. Although that represents nearly 8 percent of PayPal's revenue - and could account for up to 15 percent in 2003 - eBay executives worry about long-term legal questions surrounding Internet betting.

EBay hopes to close the acquisition by the end of the year if regulators and shareholders approve, and then phase out Billpoint. That would put 50 eBay employees out of work, though Whitman said she hopes many would find spots elsewhere in the company.

PayPal would remain a distinct brand, and its 750 employees would still be headed by current CEO and co-founder Peter Thiel, who would report to Whitman.

"What we set out to do was build a new global payments system," Thiel said. "I think this is the way to achieve (PayPal's) founding vision."

Like eBay, PayPal is a rare Internet-based business success. After beginning with just 24 experimental users in October 1999, PayPal boasts more than 15.4 million accounts and says it transferred about $1.6 billion in the most recent quarter.

Although regulators in some states have questioned whether PayPal might need to be licensed as a bank - a potentially worrisome prospect for PayPal's growth - the company had one of this year's best initial public offerings, with its stock rising 55 percent on its first day of trading in February and still well ahead of its $13 opening price.

Rumors about a possible eBay takeover of PayPal surfaced in April. Since then, PayPal's prospects have only improved as the company posted its first quarterly profit and the regulatory questions about its business appear to be fading, Whitman said in an interview.

Also, Wells Fargo & Co. agreed last month to handle PayPal's credit card business, a step that could eliminate problems PayPal had in dealing with rules imposed by MasterCard and Visa.

The deal calls for PayPal shares to be converted into 0.39 shares of eBay, which at Friday's closing prices valued PayPal at $1.5 billion, an 18.1 percent premium at the time.