Starboard Value ratchets up pressure on eBay to sell its classifieds business

Starboard blasted eBay in a public letter​ on Tuesday for its handling of an investor-led strategic review.

eBay continues to face a pressure campaign from investors to spin off or sell its classifieds business. Starboard Value, a prominent shareholder in the e-commerce company, blasted eBay in a public letter signed by managing member Peter Feld for its handling of an investor-led strategic review. 

In a nutshell, Starboard believes that eBay has shown a lack of urgency acting on the results of its operating and strategic reviews, and that it has prolonged and even avoided discussions to separate its classifieds business. Moreover, Starboard thinks eBay should ditch its focus on selling new, in-season merchandise on its marketplace in favor of offering hard-to-find resale items like the company was known for in its early days.

From Starboard's letter to eBay:

It has been almost twelve months since these commitments, and there has not been enough progress. No clarity has been provided on a separation of Classifieds, the Operating Review targets anticipate only limited margin expansion while revenue growth has continued to decelerate, and the Company has neither added a new director nor announced the departure of an incumbent independent director. 

In order to achieve the optimal outcome, we believe Classifieds must be separated, and a more comprehensive and aggressive operating plan must be put in place to drive profitable growth in the core Marketplace business. 

Last March eBay began to face investor-led pressure to restructure and sell some of its businesses. In response, the company's board approved a strategic review of eBay's assets, including StubHub and eBay Classifieds Group. At that point eBay began working with prominent shareholders Elliott Management and Starboard Value as it reviewed strategic options. eBay previously added two independent directors to its board as part of the review agreement with activist investors.

After concluding its operating review in October, eBay announced a three-year plan to improve margins and reinvest in customer initiatives. The company said its plan for operating efficiency, combined with reinvestments and 2019 margin expansion, should drive 3 points of additional operating margin by 2022 and create capacity to reinvest in customer initiatives. eBay then announced that it was selling StubHub to Swiss ticket resale marketplace viagogo for $4.05 billion.

Starboard, clearly still unimpressed with eBay's strategic plan and roadmap, is now ratcheting up the pressure on eBay to act on initiatives that would improve shareholder value. In addition to selling or separating its classifieds business, Starboard said eBay needs "a more stringent focus on profitability" and suggests the company "return to its roots in targeting its historical core buyer universe of 'self-expressionists and treasure hunters', who are seeking unique, hard-to-find, or value-oriented items". 

From Starboard:

We believe that these are areas in which eBay can find success as an online marketplace. This focus should also enable eBay to increase its assortment from product areas that have historically had higher take rates and continue de-emphasizing the lower quality GMV that eBay focused on as it began emphasizing its assortment of new, in-season merchandise over the previous few years. 

eBay responded to Starboard's letter Tuesday by essentially reiterating its plan to deliver shareholder value and strengthen its business. This includes scaling growth initiatives such as managed payments, improving margins, executing on portfolio transformation, and adding independent directors to its board. 

"While eBay's Board and leadership team are confident that the above actions will help us achieve our previously-stated priorities for 2020 and position eBay for sustainable, profitable long-term growth, we remain open to all value-enhancing opportunities," eBay said in its letter to Starboard

The latest investor drama calls up memories of eBay's tumultuous split from its former payments subsidiary PayPal. eBay announced plans to spin off PayPal into a separate publicly traded company in late 2014 following months of speculation -- much of which came as a result of some very public criticism from shareholder and prominent financier Carl Icahn.

Starboard pointed out in its letter that eBay's share price has drastically underperformed since its split from PayPal in 2015.