The Spin-Off Play at the Center of a $22.5 Trillion Market
Companies / Investing 2015 Apr 08, 2015 - 01:30 PM GMTBy: Money_Morning
Michael A. Robinson writes: I love the payments industry.
I love corporate spin-offs.
And I love the buyouts that so often follow spin-offs.
Getting all three of these in one deal would be a grand slam that really juices your profits.
For the deal I'm bringing to you today, we're guaranteed the first two.
And if that spin-off gets bought out, we'd have a really big winner on our hands.
Here's how I think this "grand slam" will come together…
When Divorce Is Profitable
Here we have a "legacy" tech firm that plans to spin off its much faster moving payments unit later this year.
In this transaction, you'll buy shares in one company now. And after the larger firm separates that payments business into an independent, publicly traded company – a "spin-off" – you'll end up with investments in two great companies.
And that second stock will be free – you won't have to lift a finger or pay another dollar to get it.
Years of research shows us that new spin-offs usually beat the market by double digits for up to three years – so we already have a pretty good deal going here.
However, I believe this separated company will be very attractive to several suitors within the $1.6 trillion payments industry, which is rapidly changing and growing due to near-daily innovations in mobile technology and e-commerce.
A corporate breakup is almost always a rallying point for the new company's stock.
The reason is simple. As companies bulk up over the years, their sheer size and complexity often serve as a brake on their fastest growing units.
In fact, the more disruptive the technology, the more likely the spun-off firm will outperform both its parent and smash the overall market.
If you're not convinced, just look at that research.
Lehman Bros. studied 85 spin-offs between 2000 and 2005 and found that they beat the Standard & Poor's 500 Index by as much as 45% in their first two years as independent companies.
Moreover, the further you look back, the brighter the picture.
Two professors at Penn State University examined 30 years of market data covering 174 spin-offs. Their study revealed that in the first three years of operations these new companies showed price appreciations of 76%, beating the S&P 500 by 31%.
The corporate spin-off I want to share with you today, I believe, will do even better.
A Hyper-Growth Field
See, when it splits into two later this year, eBay Inc. (Nasdaq: EBAY) will unleash a powerful growth firm – one that's growing 20% a year.
EBay will be releasing PayPal, its digital payments processing firm, as a publicly traded company. PayPal has long been a leader in digital transactions – and it's making big moves in the rapidly growing field of mobile payments.
Mobile payment volume at PayPal in 2014 was just 20% of its total.
But we can expect that percentage to grow as PayPal continues to innovate its "mobile wallet," make strategic acquisitions and improve its relationships with mobile app-based companies like Uber and Airbnb, where PayPal is the engine in the payment infrastructure.
Industry analysts predict that we could see the mobile payments industry hit $1 trillion in transactions in as little as a decade.
In other words, the growth here is off the charts. Last year, according to Gartner, shoppers used their mobile devices to buy goods and services valued at $50 billion.
As impressive as that sounds, it's just the beginning. Gartner predicts that mobile payments could hit as much as $214 billion by the end of this year.
That's a fourfold increase in just 12 months.
$22.5 Trillion Up for Grabs Thanks to This Corporate Spin-Off
Statistics gathered by multiple analysts bear out these optimistic projections.
The Nilson Report, a newsletter covering the payment system industry, pegs the global value of credit card payments at $9 trillion and debit payments at $12 trillion. The forecasters at eMarketer value online commerce at $1.5 trillion.
So, even if PayPal captures just 5% of the combined $22.5 trillion in markets that mobile payments are already disrupting, that would value its market at $1.2 trillion.
And PayPal is well on its way there. With 162 million active customer accounts, the company already fueled the digital payments revolution.
In 2014 alone, the company added 19 million customers and saw its payment volumes hit a staggering $235 billion. That represents a year-over-year growth of 26%. PayPal's revenue came in at $8 billion, a 19% bump from the previous year.
Moreover, it's grabbing mobile commerce market share. While mobile commerce grew at a 54% pace last year, PayPal saw 68% growth in the space.
That means PayPal is growing 26% faster than its own hyper-growth industry.
A Takeover Candidate
All of which brings me around to that potential buyout.
PayPal is setting itself up as one of the go-to firms in the mobile payments industry – and that makes it a big takeover candidate.
To see why, just take a look at CEO Dan Schulman's background.
Schulman came to PayPal last year from credit card leader American Express Co. (NYSE: AXP).
Before that, the former collegiate athlete who counts martial arts as a hobby was the CEO and founder of Virgin Mobile USA Inc. Schulman is busy filling out PayPal's franchise.
Just a few weeks ago, Schulman agreed to buy mobile-payments startup Paydiant for $280 million – a deal that finalized yesterday. Paydiant's technology will help PayPal customers use their e-wallets in physical retailers – much like Apple Pay users can now.
My suggestion that PayPal could become a takeover target is more than just idle speculation. That type of move is part of Schulman's track record. He was running Virgin Mobile when it was acquired in 2009 by the forerunner of Sprint Corp. (NYSE: S) for $688 million.
Some of you may still be balking at the thought that to own PayPal you have to first buy eBay. Let me reassure you that eBay is well prepared for life after PayPal.
Over the last two years, eBay has raided Cupertino, Calif., and hired several talented Apple Inc. (Nasdaq: AAPL) senior execs to boost its payments and e-commerce technology.
For instance, eBay recruited e-commerce developer R.J. Pittman and named him chief product officer. It also wooed Bora Chung, who developed payment technology for Apple's online store. She now serves as eBay's vice president for payments, financing, and transactions
With a $69.28 billion market cap, eBay is trading around $57. It has 20% operating margins and throws off a lot of cash. Last year, it generated $4.9 billion in free cash flow.
In other words, you get two things by investing in eBay.
First, you get the parent company – a solid long-term e-commerce play.
Second, you will automatically get shares in PayPal, a rapidly growing firm with strong ties to what I think is the tech story of the year – mobile payments.
That gives your portfolio both a solid foundation and a bonus stock that will give us maximum profits.
Thanks to Paypal's spin-off from eBay, you're now able to get in on PayPal before its IPO later this year. That wasn't the case when PayPal made its first public offering.
Back in 2002, the only folks getting rich off the pre-IPO PayPal were venture capitalists, wealthy individual investors and big financial firms.
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Source :http://moneymorning.com/2015/04/07/this-corporate-spin-off-is-your-next-2-for-1-stock-play/
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