EBay sensibly bids $2.4 billion to go beyond auctions

March 28, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran
EBay has sensibly bid $2.4 billion to go beyond auctions. The fast-growth days for the Internet giant’s marketplace unit are behind it. Running Web fulfillment and delivery efforts for others promises growth and is a natural extension of its own business. Buying GSI Commerce does the trick. The 51 percent premium is big but the price still looks reasonable.

While eBay’s marketplace division is a cash cow, with margins running around 40 percent, sales last year were about the same as in 2008. Eliminating shady sellers and improving search may bring back a modicum of growth. Selling other companies’ spare stock promises a bit more. But taking on this new line of business is a better way to bring profit growth, as eBay already has the required technology and a thriving payments system in PayPal.

Buying GSI does this. The company helps run Internet sales for companies ranging from Ralph Lauren to Toys R Us. The price looks reasonable, too. The headline figure is about 10 times estimated EBITDA for 2012. EBay’s auction business is worth perhaps 12 times this same multiple, according to Merrill Lynch research. Yet GSI is growing faster, and the combined company thinks it can fetch $60 million synergies, most of which will come as duplicate overheads are eliminated.

This calculus is complicated by the fact eBay is selling some of GSI’s businesses back to the company’s founder for almost $500 million while retaining some potential upside. But operations such as GSI’s discount luxury business Rue La La, which faces fierce competition from the likes of Gilt Groupe, look more like a money sink than a huge profit center.

EBay’s purchase carries some risks. While the company has clamped down hard on cheap knock-offs sold in auctions, the public may still associate it with low-end merchandise. Fancy retailers and designers could get twitchy at the prospect of an eBay subsidiary touching, and perhaps tarring, their online commercial cachet.

But these risks are probably small. EBay knows it must respect clients’ brands. If it does, eBay’s value will be swelled as it earns a growing stream of profits.

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