JIM WILSON
Investors should applaud eBay Inc. for its plan, announced this week, to spend $2.4-billion (U.S.) to acquire e-commerce services firm GSI Commerce Inc.
It's still far from certain that eBay will be able to turn the money-losing business into a winning proposition, but buying GSI represents the kind of move that the world's largest auction company must make to keep growing.
The market for collectibles and inventory sales from small businesses is no longer a high-growth business. To keep investors on board, eBay needs to expand in other areas and hold off an onslaught of new competition.
"EBay's core marketplace business is eroding while key competitors - principally Amazon - put up huge numbers," says Brian Walker, an analyst with Forrester Research Inc. "Growth must come from the much larger market segment of large merchants."
This week, the company moved to close the gap with Amazon and go after the business of big retailers. Pennsylvania-based GSI Commerce helps big merchants sell online, providing an infrastructure that includes order management, payment processing, customer service and shipping and tracking. If the deal goes through, it will not only be eBay's largest acquisition in its 16-year history, it will alter the direction of the company.
John Donahoe, who became chief executive officer in 2008 with a mandate for change, wants to combine GSI's infrastructure with eBay's powerful online payments system PayPal and its electronic marketplace to turn the company into a global commerce powerhouse.
"Commerce is at an inflection point where the lines between online and offline are blurring," Mr. Donahoe said on a conference call on Monday. "We see retailers of all sizes, merchants of all sizes, looking for partners that can help them grow their businesses."
The Challenge
The trouble is that, up to this point, large brick and mortar retailers have not been comfortable using the eBay marketplace, which instead attracts a loyal following of consumers and small businesses. Once sellers top $1-million in revenue they tend to move to other e-commerce platforms, such as Amazon's, says Mr. Walker.
Mr. Donahoe faces a tough challenge given the speed of change in the industry and the strong positioning of rivals. In GSI, he gets a money-losing business with operating margins of less than 1 per cent. But he also acquires relationships with 180 retailers whose inventory and e-commerce sites are managed by the firm. These include major brands Levi Strauss & Co., Timberland, Calvin Klein, Toys R Us Inc. and Major League Baseball.
The engine of eBay's growth will be PayPal, the online payments system that the company acquired in 2002 and now boasts 94 million accounts around the world. PayPal generated about $3.4-billion, or 37 per cent, of eBay's $9.1-billion of revenue last year. The company forecasts that PayPal's revenue will double in two years and become eBay's largest business unit within three to five years.
PayPal will also be a critical component of eBay's new business built off GSI's platform. EBay will likely promote the payment service on larger retailer sites as the alternative to Visa, MasterCard, American Express and other credit cards. In addition, PayPal will use GSI's infrastructure to roll out a multi-channel payment system that will take advantage of the proliferation of smart phones, Mr. Walker says.
Through its online marketplace, eBay has already developed one of the world's largest mobile commerce businesses. Colin Gillis, an analyst with BGC Financial LP, says the transaction value of eBay's "m-commerce" tripled to $2-billion in 2010 from 2009 and should double to $4-billion this year.
Offline Meets Online
The company is positioning itself well for the "blurring" of the offline and online retail worlds, he says. For example, last June, eBay bought RedLaser, a free scanning application for iPhone and Android smart phones. The program can scan bar codes for comparing prices with other retailers. The app also finds nearby stores that have what the shopper is looking for, by applying GPS technology.
Mr. Gillis values the stock at 18 times estimated 2011 earnings and has a price target of $35. He rates it a "buy." Most of the Street, however, remains decidedly cool to eBay at its current valuation. Two-thirds of analysts rate the stock either a "hold" or "sell" today. Heath Terry, of Canaccord Genuity Corp., calls the stock a "hold." Using a multiple of 16 times 2011 share profit, he calculates that the stock is worth $32 a share.
Although he likes the idea of the GSI acquisition, he says eBay will face intense competition.
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EBay has made significant acquisitions to expand its technology and market reach. Here are the largest, in U.S. dollars:
$2.6-billion
Skype Technologies (2005)
(Sold 70-per-cent stake in 2009 for $2-billion)
$2.4-billion
GSI Commerce (2011)
(Proposed)
$1.4-billion
PayPal (2002)
$1.2-billion
Gmarket (2009)
$905-million
Bill Me Later (2008)
$668-million
Shopping.com (2005)