By Phil Wahba
REUTERS - Activist investor Carl Icahn has taken a stake in Ebay Inc and is proposing a spin-off of the company's fast-growing PayPal division, but the e-commerce giant rebuffed the overture, setting the stage for a potential battle.
EBay, which bought PayPal for $1.5 billion in 2002 and has considered hiving off the multibillion-dollar payments service, argued on Wednesday that the business would lose synergies with the overall e-commerce business as an independent unit.
Some analysts, however, said that operating as a separate entity would encourage other online retailers to adopt the service and help retain key executives, with a spinoff that could unlock the value of a service that processed $180 billion in 2013 payments.
Icahn was not immediately available for comment.
Shares of Ebay, which also reported earnings per share a penny above Wall Street expectations, jumped as much as 12 percent. The stock was up 7 percent at $54.41 after hours.
"I expect it to be a battle," BGC Partners analyst Colin Gillis said, citing eBay's longstanding opposition to a PayPal spinoff. "One of the reasons for that is because for commerce and payments, you need to remove as much friction from those two systems as possible. If you separate it out, you put more friction between" them.
PayPal started life as an independent company, founded in the late 1990s by technology entrepreneurs including venture capital investor Peter Thiel.
Icahn's proposal comes as the billionaire investor is urging Apple Inc to share more of its $146 billion cash pile with shareholders. The activist is demanding Apple do an additional $50 billion in share buybacks, which the company is advising shareholders to reject.
PayPal battled with eBay for supremacy in the emerging online payments market. But soon after it went public in 2002, eBay acquired PayPal for $1.5 billion. Today, its growth outpaces the rest of the company and it accounts for a large chunk of eBay's overall stock market value.
"Payment is part of commerce, and as part of eBay, PayPal drives commerce innovation in payments at global scale, creating value for consumers, merchants and shareholders," eBay said in a statement on Wednesday.
Icahn, who earlier this month bought shares and derivatives giving him a 0.8 percent economic interest in eBay, also nominated two of his employees to the eBay board. Those employees were not identified.
Revenue at eBay's PayPal division rose 19 percent during the holiday quarter, fueled by the growing use of mobile phones to shop. PayPal's total payments volume, a gauge of how much it is used to complete a transaction, rose 25 percent to $180 billion worth of transactions.
Companywide, revenue rose 13.5 percent to $4.53 billion for the quarter ended December 31.
For 2014, eBay forecast revenue of between $18 billion and $18.5 billion, while analysts expected a forecast of $18.5 billion, according to Thomson Reuters I/B/E/S.
Net income for the fourth quarter was $850 million, or 65 cents a share, up from $751 million, or 57 cents a share, a year earlier. Excluding some items, eBay earned 81 cents per share, a penny better than expected.
On Wednesday, the company also said it had authorized an additional $5 billion in stock buybacks.
(Additional reporting by Dhanya Skariachan in New York, writing by Edwin Chan, editing by Bernard Orr)