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March 19, 2014, 4:27 p.m. EDT

Carl Icahn’s 80/20 vision of eBay and PayPal

Billionaire investor lays out his scenario for a partial separation between companies

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By Rex Crum, MarketWatch

SAN FRANCISCO (MarketWatch) — It’s no secret that Carl Icahn has had a vision of which way eBay Inc. should go with its PayPal electronics-payment business.

And on Wednesday, that vision got a little clearer. If your idea of perfect vision is 80/20, anyway.

That’s the view Icahn believes eBay /zigman2/quotes/204653455/composite EBAY +2.50%  should have with regards to PayPal. Specifically, he called for eBay to sell off 20% of PayPal in a public-stock offering and maintain an 80% ownership stake in the business. Icahn made his views known in what may be his longest screed since he began battling with eBay over PayPal, and certain members of the eBay board of directors several weeks ago.

“We believe conducting a 20% IPO of PayPal – and creating two dedicated and highly-focused independent businesses – will provide the best opportunity for these businesses to remain competitive over the long-term,” Icahn wrote in his latest open letter to eBay shareholders. “The 20% IPO structure should alleviate any concern of lost synergies. All of the “secret sauce” and “flywheels” would be preserved.

Icahn, who owns about 2% of eBay’s stock, gave what might as well be called his “seven points” for why he thinks it makes sense for eBay to spin off 20% of PayPal into a separate, publicly traded company. In a nutshell, Icahn said such a move:

1) Highlights value. “A separation of the businesses will allow investors and analysts to more clearly see the value” of what Icahn called PayPal’s sustainable double-digit growth and eBay’s strong free cash flow.

2) Focuses management teams. This has been a big one for Icahn, who has repeatedly said the “inexcusable incompetence” of eBay’s management has cost its shareholders billions of dollars.

3) Creates a valuable currency for acquisitions and attracting top talent. Icahn noted eBay’s recent $800 million purchase of Braintree in order to incorporate its payments processes with PayPal, but said PayPal’s stock would be “a more valuable currency” on its own for incorporating advantages in the payments business. Icahn went on to say that “PayPal employees will be more motivated when the company operates independently of eBay.”

4) Prevent dissynergies. Icahn hinted that PayPal, by being so tied to eBay, is unable to pursue potential strategic partnerships with the likes of Google Inc. /zigman2/quotes/205453964/composite GOOG +7.27%  and Facebook Inc.

5) Preserves current synergies. The main point here being Icahn’s belief that eBay and PayPal should have “a commercially advantageous long-term contract between the two companies.”

6) Extends PayPal product offerings. “We believe that focus from a dedicated management team, unencumbered by competing agendas, could drive more innovation at a faster pace,” Icahn said, adding that the company has a “significant opportunity” to offer products such as check writing, direct deposits and interest on PayPal balances.

7) Allows for true “world-class” boards. Throw a dart and you can probably hit one of the many reasons Icahn is mad at eBay’s current board of directors , and members Marc Andreessen and Scott Cook, in particular.

For its part, eBay has no plans to separate PayPal. Why should it? In 2013, PayPal accounted for $6.6 billion of eBay’s total $16 billion in sales. EBay has even set up a Web page to highlight why it thinks the two businesses are “better together.” Among the points eBay makes is that eBay is responsible for delivering 30% of PayPal’s new users and 50% of PayPal’s mobile volume.

And just before the market closed, eBay issued a statement of its own, saying “Being part of eBay Inc. for more than a decade has enabled PayPal’s strong growth and global leadership position in digital payments.” EBay added that since PayPal became part of the company, it has built relationships with the likes of Visa /zigman2/quotes/203660239/composite V -0.58% , MasterCard /zigman2/quotes/207581792/composite MA +0.23%  and Facebook . 

But will Icahn’s vision be clear enough to sway Wall Street, or eBay shareholders, in his favor?

“He says analysts can’t analyze the business properly, and a partial IPO would help,” said Gil Luria, who covers eBay for Wedbush Securities and has a buy rating and $70-a-share price target on eBay’s stock. “The truth is we know the revenue numbers and we have all we need to do our jobs.”

Luria admitted that Icahn’s ideas “could unlock some short-term value,” but over the long run, he thinks PayPal is more valuable with eBay.

“He certainly writes these things with an amount of humor,” said Gil Luria. “These points have been made in the past, so there’s nothing too surprising here.”

Surprising or not, neither eBay or Icahn are likely to adjust their vision of each other any time soon.

More tech news from MarketWatch:

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Rex Crum is a reporter for MarketWatch in San Francisco. Follow him on Twitter @mktwcrum.

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