PayPal Acquisition Cuts EBay's Risk of Losing Key Supplier to Competition

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EBay Inc. announced plans yesterday to buy online payments service PayPal Inc. for $1.5 billion in stock, a transaction that brings into the fold a supplier eBay increasingly has come to rely on for payments.


Since its October 1999 launch, PayPal has acquired more than 15.4 million accounts and handled payment volume of $1.61 billion to $1.63 billion in the second quarter. eBay accounts for 60 percent of PayPal's business with the rest coming from small merchants.


"If PayPal is going to continue to increase its market share, then eBay's going to be more dependent on them, so the decision to acquire them rather than just rely on them is a strategically sound move," said Lisa Strand, director and chief analyst at NetRatings Inc., a Milpitas, CA, market researcher.


In May PayPal saw a 20 percent jump in site traffic to 6.4 million visitors, according to Nielsen//NetRatings.


In results announced last month, PayPal estimated its second quarter revenue at $53 million to $54 million and pro forma earnings of an estimated $486,000.


PayPal allows buyers and sellers to transact money through e-mail. Buyers make payments online via bank accounts or credit cards. PayPal then transfers the funds to the sellers' account. It gets a cut of the transferred amount as its fee.


With this acquisition, expected to close in the fourth quarter after stockholder, government and regulatory approvals, eBay will shutter its own Billpoint online payment service. But it will continue to allow payments via check, cashier's check, money order or credit card.


"Sixty percent of eBay's transactions are done through PayPal, Billpoint and other online services like C2it, iBill, CertPay, Western Union, Bidpay and Yahoo Pay Direct," said Kevin Pursglove, an eBay spokesman.


The deal also will expose eBay, San Jose, CA, to the other 40 percent of PayPal users -- small merchants who currently do not use the Internet's No. 1 auction service.


EBay's consolidated net revenue for the second quarter was approximately $266 million and net income $54.3 million.


Still, eBay is looking to diversify its revenue stream. Online payment is a key component of trading on eBay. Once integrated, PayPal will allow eBay buyers and sellers to trade with more speed, ease and safety.


When eBay first started looking at online payment options, close to 80 percent of transactions were done by check, money order or cashier's check, Pursglove said.


"And that just means that there's a very slow process in having that item processed at the beginning, then mailed and then processed at the back end," Pursglove said. "Here, when using an online payments service such as PayPal, as soon as a transaction is consummated online, the payment process can begin instantaneously. Which means the seller can sell that item, ship that item in a much faster period of time and then get more items on the site."


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