After planned split, eBay and PayPal promise to stay friends

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SAN JOSE, CA - JANUARY 22: A sign is posted in front of the eBay headquarters on January 22, 2014 in San Jose, California. eBay Inc. will report fourth quarter earnings today after the closing bell. (Photo by Justin Sullivan/Getty Images)
Photo by Justin Sullivan—Getty Images

Ahead of their imminent corporate split, eBay and PayPal have signed an agreement that prohibits them from competing against each in their core businesses other after they’ve parted ways.

The agreement, made in a regulatory filing Thursday, is intended to keep the two independent companies healthy while on their own.

Most notably, they will remain in their respective lines of business. PayPal is forbidden from creating its own marketplace for physical goods, while eBay has promised to steer clear of building a payments system. One caveat is if PayPal is acquired by an eBay e-commerce competitor. In such a case, eBay would be able to dive into payments after giving PayPal 15 to 21 months advanced notice.

The companies joined forces in 2002, when online marketplace eBay (EBAY) acquired PayPal in what ultimately became one of the most successful mergers in Silicon Valley history. PayPal blossomed under eBay and, for some time, has grown far faster than its sister e-commerce division.

Six months ago, under pressure from activist investor Carl Icahn, eBay said it would spin out PayPal into an independent company. The actual split, billed as a way to unlock shareholder value, is expected to take place later this year.

The deal the two sides signed is for five years, with a one-year transition. Although they can’t compete against each other, they can pursue outside business opportunities. For example, eBay can work with other payments processors and PayPal and provide services to other marketplaces. But eBay must conduct 80% of transactions via PayPal – with higher or lower commissions if the number rises or falls – as a way to guarantee it a stable source of revenue.

Also included in the agreement were some details about the upcoming makeup of the two companies’ respective boards. Current eBay board member Tom Tierney will chair the new eBay board, joined by current eBay CFO Bob Swan and future eBay CEO Devin Wenig. Meanwhile, current eBay CEO John Donahoe will chair PayPal’s board, which will also include future PayPal CEO Dan Schulman. EBay founder Pierre Omidyar will serve on both boards.

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