EBay to block PayPal gambling payments

Monday, July 8, 2002 | 11:03 a.m.

SUN STAFF AND WIRE REPORTS

SAN JOSE, Calif. -- Online auction giant eBay Inc. announced today it is buying electronic payment facilitator PayPal Inc. for more than $1.3 billion in stock, in a long-rumored deal that the companies hope will make Internet trading faster, easier and safer.

The deal could hurt the Internet gambling industry, as eBay will end PayPal's practice of handling gambling transactions. Although it is widespread, Internet gambling is considered to be illegal under U.S. law.

Separately, eBay released second-quarter earnings early, posting a net 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.

Mountain View-based 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, taking a fee based on the amount transferred. About 60 percent of its business comes from eBay users.

Like eBay, it is a rare Internet-based business success. After beginning with just 24 experimental users in October 1999, PayPal has become profitable and boasts more than 15.4 million accounts. The company says it facilitated about $1.6 billion in money transfers 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.

In early trading today, eBay shares were down $2.28, nearly 4 percent, at $58.30 on the Nasdaq Stock Market. PayPal stock soared $2.38, nearly 12 percent, to $22.38.

EBay's chief executive, Meg Whitman, said the deal should make eBay "an even more compelling trading platform" because PayPal would be simpler to use and speed up the rate of transactions made on eBay. Even now, 60 percent of the $13 billion in merchandise traded annually on eBay is paid by check or money order, 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, she added.

"It brings together two companies in a way that will benefit our users," Whitman told financial analysts in a conference call before the stock market opened today.

EBay would close its own similar service, eBay Payments by Billpoint, which was later to the game and hasn't proved as popular as PayPal; more eBay sellers accept funds through PayPal than through Billpoint. Consequently, an eBay takeover of PayPal had been rumored since April.

Since then, PayPal's prospects have only improved, Whitman said in an interview. The regulatory questions appear to be fading, she said. 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.

While most of PayPal's business comes from eBay, it also handles payments for many other sites. Whitman is eager to capture that action -- but not all of it. Nearly 15 percent of PayPal's revenue comes from facilitating payments for gambling sites. EBay would halt that practice entirely because of potential long-term legal questions.

San Jose-based 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."

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.

Despite releasing the essentials of its second-quarter earnings, eBay still plans a full report on July 18. PayPal's results are due July 24.