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eBay to Buy PayPal; Will Restrictions Follow?
>> By Eric Black
 July 15, 2002
PALO ALTO, Calif. -
Last week's announcement by Internet auction giant eBay that its
pending acquisition of PayPal Inc. would mean the latter's exit from
the online gaming arena caused some adult Internet entrepreneurs to
raise their eyebrows while others merely shrugged.
The
announcement followed by days eBay's release of a letter of intent to
purchase PayPal for $1.5 billion. Among other things, PayPal provides
"payment by email" services for adult Websites.
Eric J. White,
founder of and chief technology officer for adult toy manufacturer
Virtual Reality Innovations Inc., has had mostly pleasant experiences
as a client of both the online auction site and the payment provider.
Still, the thought of having both under a single umbrella worries him,
despite assurances from sources close to PayPal that the company does
not intend to abandon the adult market.
"It concerns me that
eBay is absorbing PayPal," White said. "eBay has not been a friend to
the adult industry. After the online gambling is gone from PayPal, will
the adult industry be next?"
As one of the largest and most
profitable sites on the Internet, eBay has diligently cultivated a
wholesome corporate image. Though some of its users traffic in adult
wares, they do so under restrictive guidelines. With PayPal expected to
move under eBay?s corporate umbrella early next year - pending approval
by the U.S. Justice Department - the legal and financial fallout for
PayPal's adult clients may take a while to settle.
The president
of Dreamrock Digital, a developer known as "MX," said he also feels
eBay's gambit may have implicatioons for the adult Internet. With the
merger proposal in play, the waters have become murkier for those
settling transactions through PayPal, he said: "As more and more adult
entertainers start operating their own Websites, other credit card
processors like iBill will most definitely start feeling the heat from
players like PayPal [because of its expanded backing from eBay]."
MX
also noted, however, that "EBay's community of 46 million users
worldwide represents a growth opportunity for PayPal, so this is a
win-win situation for [both of the companies]."
Although PayPal
estimated that about 50 percent of its revenues are derived from eBay
transactions, Rajiv Dutta, eBay's chief financial officer, said the
figure was closer to 60 percent. eBay's acquisition of the
four-year-old payment-processing firm will be instrumental in the
auction site's realization of its 2005 revenue goal of $3 billion, he
predicted.
Outside the adult online industry, not everyone is
happy with the proposed merger, either. Last week in a Delaware court,
PayPal shareholder Kathleen Rooney filed papers seeking an injunction
against the acquisition. Rooney's filing was followed quickly by a
similar one by fellow shareholder Louis Crespo, who is seeking
class-action status for his suit.
Both legal actions allege the
eBay/PayPal merger represents a breach of the companies' fiduciary duty
to shareholders, and that the price eBay is paying for PayPal is unfair
and inadequate.
Before its Feb. 8 initial public offering,
PayPal had reported a small operating profit. In June, PayPal forecast
its second quarter earnings revenue at nearly $54 million.
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