Case Analysis of

eBay Inc.

Date : 16/01/2012

Submitted to : Dr. Parmjit Kaur

Submitted by : Sourabh Bumb

Case Overview
The given case is about one of the first internet based trading firm eBay which is planning to go for an IPO. eBay has been one of the most successful person to person trading portal of the late 1990s. The exact period discussed in the case is 1998 when the Asian and other emerging countries were facing an economic slowdown which was a warning signal for European and and US economies. Though eBay had registered very good financial performance in the preceding years in terms of profit and revenue but eBay was now facing rising competition from various other firms providing person to person trading facilities. At such a time period, eBays top management had decided to raise equity capital so as to invest in technological development to counter the increasing competition, but the problem was high market volatility during that period which poses a threat to eBay share value in case of an IPO. Due to such Volatile conditions, the companys management was not sure whether issuing an IPO would be a right decision at such a time when most of the planned IPOs had either been postponed or cancelled as observed from the following graph.

The implications of a failed IPO would have severe impact on eBay valuation and companys image. So the decision to issue an IPO at the time of economic slowdown could have disastrous impact on the company.

Brief introduction to eBay, Inc.

The founder of eBay is a Franco-Iranian programmer at Baltimore, Pierre Omidyar. He first set up his website called AuctionWeb to try out the auction concept and the first item listed for sale was his very own broken laser pointer. eBay, Inc., together with its subsidiaries, provides online marketplaces for the sale of goods and services, online payment services, and online communication offerings to a diverse community of individuals and businesses in the United States and internationally. The company operates Communications. in three segments: eBay Marketplace, Payments, and

The eBay Marketplaces segment provides infrastructure to enable online commerce in a variety of formats, including the traditional auction platform; and its other online platforms, such as Rent.com, Shopping.com, Kijiji, mobile.de, and Marktplaats.nl. Its services include trust and safety programs; feedback forum; safeharbor program; eBay standard purchase protection program; customer support; tools and services; and My eBay, which permits users to receive a report of their eBay activity that includes bidding, selling, account balances, favorite categories, and recent feedback, as well as About Me, which provides users to create their own personal home page.

Main points captured in the Case

a) Type of Composition of management The company has a young 31 year old founder chairman which means company would be eager to adapt and it will have a good impact on its learning curve. The responsibilities of CFO and VP operations are carried by the same person. b) First mover advantage eBay is one of the first firm of its own kind i.e. an online person to person trading portal, so it will reap the first movers advantage. c) The market volatility of 1998 means technical analysis has very scope at that time for speculation where as the fundamental analysis was more important. d) Products offered by eBay included antiques, sports memorabilia, books, toys, cars, computer, dolls, coins, jewellery, electronics, photography, and music. e) The company faced Challenges in the form of Rapid Technological advancements Capacity constraints Web/network infrastructure System Security from AOL, Microsft, Amazon.com,

f) The company was facing rising competition ZAuction, Surplus auction etc.
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g) Some important figures for year 1998 Growth in Sales Growth in Profits Growth in Users Growth in auctions Around 8 times More than doubled Around 3 times Around 3 times

Case analysis:
1) S&P 500 & ISDEX Trend performance comparison and market trend :
If we observe the Stock Market Performance of the S&P500 Index carefully and compare it with that of ISDEX Index, we can see that the stock prices have declined dramatically from 15 July, 1998 till the end of August.

Observing the above graph, we can see that the stock prices have declined dramatically from 15 July, 1998 till the end of August but the prices in the last 15 days have stabilised and are beginning to look up. Both the S&P 500 Index and the ISDEX Index have found their resistance levels and the prices have levelled out. The trend suggests that the prices should increase in the coming days or at least should drop any further. With this information, it can be made out that the management of the company should go ahead with their decision of bringing out the IPO but they should be very careful with the pricing of their IPO because an underpriced IPO would reduce the value of the firm and an overpriced IPO would remained undersubscribed.

2) Corporate Governance
Two important factors which need to be discussed for solving the case are Corporate Performance & Corporate Governance.
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Corporate Governance can be measured by using ownership concentration i.e. the distribution of ownership among different categories of owners provides useful information about the corporate governance structure of the company. Ownership Concentration Ownership concentration is a measure of the distribution of power between major shareholders and dispersed shareholders. It is an indicator of whether some shareholders can influence the company management and if the control is contestable. This measure acts as a barometer for the Corporate Performance Higher the concentrations of shares with a small number of shareholders, the greater the role of those shareholders in the day to day management of the firm, the lesser the role of the board of directors. On the contrary, lower the concentration of shares with a small number of shareholders, lesser is their involvement and greater is efficiency of decision making. There are two popular measures for calculation of the ownership concentration: T-3 measure Fractions of share held by largest 3 shareholders & T-5 measure Fractions of share held by largest 5 shareholders . a) Fraction of shares held by the Top 3(T3) shareholders Sr. No. 1 2 3 Name of owner Pierre, Founder and Chairman Jeffrey, VP analysis Robert, Benchmark Funds T3 Before IPO (in %) 42.0 28.1 24.3 94.4 After IPO (in %) 38.3 25.7 22.1 86.1

From the above table we can say that the concentration of shareholding was diluted by IPO which means more stakeholders and more decision making members. b) Herfindahl Index of Ownership Concentration The Herfindahl index (also known as HerfindahlHirschman Index, or HHI) is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. The Herfindahl index is a measure of the shareholding of major shareholders. It is the sum of square of percentage of shares controlled by each Top 3(H3) or Top 5(H5) shareholders. It can range from 0 to 1.0, moving from a huge number of very small shareholder to a single monopolistic shareholder.

Both the values of Fraction of Shares held by Top 3 Shareholders and the Value of Herfindahl Index of ownership concentration show that the control and management is concentrated in the hands of few shareholders. Thus, the current management and shareholders would be motivated to precisely time the launch of their IPO thus maximising their personal gains.

3) Corporate Performance
It can be measured by using Tobins Q theory or by using Return on Investment (ROI). a) Tobins QTobins Q(or Q ratio) is a ratio devised by James Tobin of Yale University. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets. This ratio can be used as a measure of corporate performance of the firm.

If Tobinss Q < 1, the Resources of the firm are being used poorly and efficiency needs to be improved. If Tobinss Q > 1, the Resources are being used effectively and the firm utilizing its assets efficiently..

Market value of common stock Book value of borrowings Current Liabilities Total

$71.53 million (Taking $18 a share) $0.167 million $5.212 million $76.91million

Assets Fixed assets Current Assets Total

$3.584 million $14.015 million $17.599 million

A Tobins Q of 4.37 shows that eBay is managing its resources really well. A Q Ratio of greater than 1 signifies that Replacement Costs is less than the market value of assets of the firm. A high Q Ratio is associated with all successful Internet & technology Firms as a large portion of the value of these firms lies in their intangibles. Thus, a high Q Ratio of eBay is in coherence with its potential as a successful technology firm. b) Return on Investment (ROI) It is a measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. ROI can be used to measure the corporate performance of the firm as this measure is free of companys capital and tax structure.

ROI of eBay for 6 months ending June 30 is 13.58% whereas all its competitors are suffering from negative operating income. This shows that eBay is managing its resources much better than its competitors & is likely to do so. Thus, it is advisable that eBay should invest in new technology & going in for an IPO would help eBay raise sufficient funds to fuel its future growth.

3) Potential Costs & Benefits of the IPO in the then prevailing conditions
Benefits 1) Increased credibility and transparency for customers and employees due to regulatory requirements and disclosures 2) IPO means increased access to capital and capital availability in secondary market. Raising capital through equity will help reduce the Debt to Equity ratio of the company by replacing debt with equity.

3) Its an opportunity for eBay to go for technological sophistication when other competitive firms are delaying their IPO (uBid). Issuing now provides a potential opportunity to build a competitive advantage through early investment of offering proceeds into new technologies. 4) Issuing IPO means a potential to invest in new upcoming Business opportunities with the raised equity capital. Costs 1) Diluted companys shareholding means adding inefficiency in decision making since there are more shareholders with diverse needs and preferences. 2) The highly volatile market means eBay faces risk of poor investor demand due to high volatility and uncertain market conditions. 3) Issuing IPO means competitors will have access to companys information and thus disclosing sensitive company information to potential competitors. 4) Going public also means management may become short term oriented to please the shareholders for immediate return.

Conclusion
With the analysis of the various qualitative and quantitative aspects of the case and the measurement of the corporate governance, corporate performance, we can say that the eBay which enjoyed very good reputation among the common public and whose fundamentals and financial statement figures reflect the chances of very strong performance among the investors, eBay provides the investors with a very good opportunity to invest at a time when there are very few IPOs so at the time of very less good and strong investment opportunities, eBay had a complete chance of efficient subscription and a good welcome by the investors. Thus, concluding in a nutshell, eBay must continue with its decision of issuing the IPO.