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Sunday, June 12, 2011

Ebay an old Friend?

I recently read the 10-K of Ebay and had to take a double take, one number that really caught my eye (this was not a positive thing) was the near $6 billion in Goodwill for the 10-K dated 12-31-10. Wow, that is a lot of overpayment of assets, I'm curious though if this is a buy opportunity. My assumption is that a vast majority of this goodwill will come off the books after the Skype acquisition by MSFT ($8 billion btw is what Microsoft paid for Skype, wow). Yes, it is true that Skype was acquired by a private equity by the name of: Silver Lake Partners. How ever Ebay did retain 35% of the company which was sold off to Microsoft after they acquired the Skype service. This could mean 2.8 Billion could be coming Ebay's way which could either write down some of the goodwill on their books or could boost earnings for the next quarter. The question is what will Ebay do with the extra funds?

We could see some investment into what Ebay believe will be the future of the company. Paypal is the gold standard when it comes to b2b, b2c, c2c payment transactions and Ebay wants to verge more into this toll booth business and away from their auction services. From what I read the it sounds like Ebay wants to make Paypal 60% or their revenues. This is a good move but there is a lot of competition coming from other parties. Ebay could use the funds from the Skype sale and invest more into security, more vendor services, or fend off competition.

Google announced their new service payment service (basically in beta testing) which could eat into Paypal revenues. Granted Google will rely on banking institutions and credit companies (ala Mastercard and Visa) but if this catches on this could spell trouble for Paypal's online payment service. It looks like the big banks are attempting to get their hands on the mobile payment industry by rolling out their own paypal services. Chase quickpay services has been rumored to start rolling out soon which could propose a legitimate competitor to Paypal. Basically because of the fees becoming significantly lower than paypal's interchange fee.

The great concern I have for Paypal in the future is if these payment services catch on it could destroy Paypal. the brightspot about this is that Ebay is well aware and they disclose this on their annual 10-K. I very much appreciated the sincere concerns the 10-K talked about but the one thing I did take from the 10-K is that it will take a long time for the competition to catch up and the nice thing about Paypal is the liability for losses is low. I do believe that the "bill me later" transaction process is a bit of concern but I believe there is more control over the losses of this services amongst management.

I suggest if you do not want to invest a huge amount of cash into Ebay shares buy Oct 10 call options @ premium of $2.00 or less. This will hedge your bet if you do not feel confident about the future of Paypal not so much Ebay.

I do own positions in Ebay calls and stock...


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