eBay CEO: Why we’re spinning off PayPal

September 30, 2014, 8:49 PM UTC

25. John J. Donahoe

David Paul Morris/Bloomberg—Getty Images

Seven months after making the case against spinning off PayPal to Fortune, eBay CEO John Donahoe is singing a different tune.

On Tuesday, eBay announced plans to spin-off online payments service PayPal into a separate, publicly traded company. Doing so, according to eBay, will help both businesses take advantage of new opportunities to grow in challenging markets.

The move comes months after activist investor Carl Icahn waged a public campaign for a PayPal spin-off. Icahn, who owns 30.8 million shares of eBay and is expected to make $180 million from today’s news, argued PayPal would grow faster and therefore be more valuable if cleaved from its parent company. (In March, Donahoe made the case that eBay and PayPal were stronger businesses together.)

But in an interview with Fortune on Tuesday, Donahoe, said the proxy fight earlier this year did not sway eBay’s board. Rather, the about-face came after a strategic review during a June board retreat that showed the split would benefit both companies.

“The synergies which helped fuel [PayPal’s growth] are declining over time,” Donahoe said.

While eBay’s marketplace, the company’s core business, accounts for over 30% of PayPal’s annual revenues, Donahoe predicted that figure will dwindle to just 15% within three years. And while the marketplaces $9.9 billion in revenues last year eclipsed PayPal’s $7.2 billion, PayPal’s 19% annual revenue growth outpaced Marketplaces’ 10%. Because of that, Donahoe said PayPal has reached a size and scale where it is no longer in need of being tethered to its sister division.

“This was a very important decision, and we were not going to make it in a reactive way based on some external event,” said Donahoe, referring to the proxy fight earlier this year with Icahn. “What I have always tried to do and will always try to do is to do the right thing, to do the right thing for eBay and position eBay for the long-term.”

Donahoe will step down from his CEO role after the spin-off is complete, which is expected in the second half of 2015. Devin Wenig, who is currently in charge of eBay’s online marketplace, will become CEO of the newly independent eBay while American Express executive Daniel Schulman is taking the helm at PayPal.

Icahn is pleased with today’s news, regardless. In a statement, he said eBay’s board and management “have acted responsibly concerning the separation — perhaps a little later than they should have but earlier than we expected.”

“This is a positive, and the spin-off unlocks value,” Mark Mahaney, managing director and analyst for RBC Capital Markets, wrote in a report on Tuesday. But Ben Schachter, a Macquarie Capital analyst, argued the separate does little to address the challenges eBay and PayPal face vis-a-vis increasing competition.

EBay (EBAY) competes with Amazon and an array of other online and bricks and mortar retailers. Meanwhile, PayPal faces off against upstarts like Square, Stripe and Apple’s new payment service, Pay.

Schachter did say that the split-up does make it easier for the separate companies to make acquisitions and sign up partners.

When Donahoe steps down next year, he will have spent 10 years at eBay. Donahoe arrived in 2005, wooed by then-CEO and ex-Bain & Company colleague Meg Whitman to run the online marketplaces and eventually succeed her. Donahoe’s ambitious turnaround plan — a strategy that included changing marketplaces’s focus from auctions to fixed-priced items — has proven largely successful. EBay’s shares have more than doubled to $57 since he became CEO more than 6 years ago.

Donahoe, who still has another year left as CEO, has offered to serve on eBay and PayPal’s boards next year, although whether he does so is up for debate. And while he called his leadership stint a wonderful, enormous learning opportunity,” he emphasized there was more work to be done. Added Donahoe: “I’m not looking backward yet. I’m looking forward.”