For ICE, EBay Would Be a Regrettable Online Purchase
(Bloomberg Opinion) -- You know how things go with eBay Inc. You go online, ask some seller a question about that highly collectible Beanie Baby, they ignore you, and then suddenly people think you’ve lost your head over a frivolous purchase.
Intercontinental Exchange Inc. must be feeling this way after the Wall Street Journal reported that the owner of the New York Stock Exchange had approached the online sales site about a takeover. Such a bid would likely be well in excess of eBay’s current $30 billion valuation. ICE “approached eBay to explore a range of potential opportunities,” according to a company statement, but eBay “has not engaged in a meaningful way.” ICE would primarily be interested in eBay’s business-to-consumer marketplace, according to the Journal.
It’s not that eBay lacks attractions. For all that ICE wears smart business attire next to eBay’s Jagged Little Pill vibe, the online auctions company is actually the older business of the two — even if the heady days of the dot-com bubble have given way to an afterlife as a punching bag for activist shareholders Carl Icahn, Elliott Management Corp. and Starboard Value LP.
Return on invested capital has clocked in at an average 14.5% over the past five years, well ahead of ICE’s 8.1%. Even after the spinoff of PayPal Holdings Inc. in 2014 shrank the business, operating cashflows have been consistently ahead of those at ICE despite the fact that its market capitalization is about 40% smaller.
The multiple underpinning that valuation is a pedestrian 12.4 times blended forward 12-month earnings, too, compared with 22.2 at ICE. That would make an offer paid for via shares or an equity raising — likely the only way ICE could finance such a large deal, given its spare $3.3 billion of annual Ebitda — an attractive option for the exchange’s shareholders.
At the same time, it’s hard to see why ICE should be a natural home for eBay. Both businesses are, in the broadest sense, “marketplaces.” But that doesn’t mean ICE ought to be going round buying up real estate in European town centers because they host things that are also known as marketplaces.
In everything but the dictionary sense, there couldn’t be a greater difference between the sort of market operated by ICE — where the main participants are huge financial institutions, trades happen within milliseconds, and all but a fraction of transactions are on the secondary market — and eBay’s slower-paced online bazaar, where around four-fifths of activity is business-to-consumer, and business-to-business sales are almost irrelevant.
As the owners of a stock exchange, you’d hope that ICE is well aware that most takeovers end up destroying shareholder value. The only exceptions are generally deals where the opportunities to save money by cutting costs and finding synergies are substantial, or where the target owns some vital expertise or intellectual property.
If that is the case, it’s frankly a bit concerning. While gross merchandise volume on eBay’s platform amounted to some $90 billion in 2018, the New York Stock Exchange alone sees annual turnover of more than $8.22 trillion, not to mention the ICE’s substantial commodities and fixed income businesses. If there’s something material that ICE has to learn from eBay, that doesn’t say much about the exchange’s business.
Exchanges are a small and incestuous world. With recent takeovers such as CBOE Global Markets Inc.’s 2016 purchase of Bats Global Markets Inc. and CME Group Inc.’s purchase of NEX Group Plc, there are precious few obvious deals left — especially as mooted Hong Kong-London, London-Frankfurt and Singapore-Sydney tie-ups in recent years ended up being rejected or blocked. That’s a problem for an industry that’s not doing much better than covering its cost of capital and wants to find new sources of income.
Purchasing exchange-adjacent businesses is one option, as demonstrated by London Stock Exchange Group Plc’s purchase of Refinitiv, a financial-data company and competitor to Bloomberg LP. But while that deal may have made some sense given how much money exchanges make from data services, it’s hard to make the same argument for eBay — unless ICE really does want to get into clearing Beanie Baby futures.
We’ve all gone and bought something online that we later regret. ICE should avoid doing so in this instance.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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