Activist Elliott is taking interest in PayPal. This is what could be next for the payments giant

The PayPal logo is displayed on the smartphone screen with a stock market graphic in the background.

Omar Marquez | SOPA photos | Light Rocket | Getty Images

Company: PayPal Holdings (PYPL)

Business: PayPal is a leading technology platform that enables digital payments and simplifies trading experiences on behalf of merchants and consumers around the world. The company operates a global, two-sided network that connects merchants and consumers with 426 million active accounts (392 million active consumer accounts and 34 million active merchant accounts) across more than 200 markets. They generate revenue primarily by charging a fee to complete payment transactions for their customers and other payment related services which usually depend on the volume of activity processed on their payment system.

stock market value: $97.7 billion ($84.36 per share)

Activist: Elliot Management

ownership percentage: not available

average price: not available

Activist comment: Elliott is a very successful and intelligent activist investor, particularly in the technology sector. The team includes analysts from leading technology private equity firms, engineers and operating partners. When evaluating an investment, Elliott also hires professional and general management advisors, expert cost analysts, and industry professionals. The company often monitors companies for many years before investing, and has a wide range of great candidates for the board of directors.

What is happening?

behind the scenes

PayPal has a solid business with its core payments business (which accounts for about 80% of its revenue) that is growing at least in line with its peers and is expected to continue to grow as e-commerce expands. In 2013, PayPal acquired Braintree, a technology-savvy payment provider that allows customers to customize their shopping carts and integrate them with their existing platforms. This division accounts for approximately 10% of the company’s revenue, but can grow by more than 20% annually. PayPal also owns Venmo, which accounts for roughly 5% of its revenue but may also grow 20% annually.

Elliott has made significant investments in technology growth companies that markets have decimated in the past year, and this is no exception. PayPal is down more than 70% from a closing high of $308.53 just over a year ago. While this is primarily due to sell-offs in growth stocks, there is an opportunity here to improve margins as the company’s expense levels for sales, marketing, and research and development are higher compared to its peers – even double the levels at some of those companies. However, Elliott is more of a strategic activist than an operational one and has had his best success by encouraging mergers and acquisitions in his portfolio companies. Elliott made its best returns from buying, repairing and selling portfolio companies. However, at a market capitalization of $99 billion, PayPal will likely be too big to do so, even with a partner. The most likely scenario is that the company encourages PayPal to explore strategic alternatives around Venmo or Braintree or acquire other companies that may have synergies with PayPal’s core business.

One such possibility is Pinterest. Last year, there were rumors that PayPal was interested in making an offer to buy Pinterest. Furthermore, one of the reasons potential suitors have historically not followed Pinterest is the perception that its founder and longtime CEO Ben Silberman wouldn’t sell it. However, he has recently loosened his grip on the company by handing over the role of CEO, which may be an indication that he is willing to listen to offers. Most importantly, Elliott has approximately 9% (or $1 billion) of the investment in Pinterest. So encouraging PayPal to acquire Pinterest could be a profitable position for Elliott.

Elliott has not disclosed the size of its position, but based on its history, we expect it to be between 1% and 2%, primarily in swaps and other derivatives, which do not have the same disclosure requirements as common stocks.

Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activism, and is the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in the 13D Active Investments portfolio. Square is also the innovator of the investment class AESG™, an active investment style focused on improving ESG practices for portfolio companies.

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