There’s downrounds. There’s wash-outs. There’s shareholder litigation. And, then there’s PayPal Inc., which is partying like it’s 1999 and has made money for all involved (including its private equity backers).
Sweetening the pot, online flea market EBay Inc. last week its intentions to acquire PayPal, which despite ingredients that ought to have spelled doom (a 1998 founding date; college-aged executives; the original Web domain X.com; an original business plan based on beaming payments on Palm Pilots) has posted a 77% gain since its Feb. 14 IPO.
EBay will acquire PayPal in a stock-for-stock transaction that exchanges 0.39 Ebay shares for every PayPal share. The actual price at which the acquisition will occur will be set after the deal passes regulatory barriers, which EBay expects to come near the end of this year.
At the close of trading on July 5, the last business day before the merger was announced, the merger terms represented an 18% premium for PayPal shareholders. Of course, PayPal shares and EBay shares will now trade in tandem until the transaction is completed or abandoned.
Even before the acquisition announcement, PayPal’s 23 private equity backers stood to make considerable gains. According to the company’s prospectus, the highest-valued private round priced at $12 per share when adjusted for splits.
If all the investors are following the rules on the lockup and nobody hedged their position or cut a deal with traders, they won’t be able to trade their shares until Aug. 14. That’s when this deal gives them a huge benefit. At that time, any inflated selling volume caused by the VCs and founders exiting their positions should be supported by the merger arbitrageurs playing the spreads between PayPal and EBay shares.
The spreads between the two companies may widen a little bit and EBay may receive some residual selling pressure, but the combined daily volume of the two companies should be able to support it. EBay’s average daily volume for the three weeks preceding the announcement was 7.1 million shares, which is considerably higher than PayPal’s daily average of 986,000 during that period. It should also be able to support considerable turnover of PayPal’s 60.6 million share float.
Since their holdings were less than 5% of the outstanding stock at the IPO, they did not appear in PayPal’s prospectus, and Venture Economics research did not uncover the size of their holdings. Also coming in under the radar, ING Barings Private Equity, Bankinter and EBank invested in PayPal’s Series D round which was priced at a $12 per share cost basis.
But even though the money is rolling in like the old days, one thing has changed since 1999: Nobody will brag about it. John Malloy of Nokia Venture Partners, Mike Moritz of Sequoia Capital, Tim Hurd and Paul Wood of Madison Dearborn Partners LLC and Jim Armstrong of Clearstone Venture Partners did not return phone calls for comment.