eBay's Crossroads: Turn Around or Break Up

eBay CEO John Donahoe

The thing about corporate turnarounds is that they’re supposed to turn a company around. As in 180 degrees. They’re not supposed to stop halfway and let the company drift sideways. But something like that is happening to eBay: Its long, slow turnaround is, well, turning flat.

For the past couple of years, the online marketplace and payments company has been engineering a return to growth under the guidance of CEO John Donahoe, who took over from Meg Whitman in March of 2008. Donahoe embarked upon an aggressive and risky effort to transition eBay from an auction house for garage clutter to a marketplace centered on larger sellers and fixed-price goods like bulk inventory.

At first, the makeover seemed to hurt eBay’s growth. But last summer, after reporting second-quarter earnings, investors began to believe in the turnaround, sending the stock rallying. But since then eBay’s stock has stalled, rising just 0.3 percent, while the Nasdaq has gained 14.6 percent and shares of Amazon have surged 30.3 percent. Back in January, there were signs that the turnaround was in jeopardy, and further evidence implies that is in fact the case.

According to data from ChannelAdvisor, an online retail services company, same-store sales at eBay declined 4 percent in May from a year earlier, the first annual decline for eBay since last summer. In a post discussing the data ChannelAdvisor CEO Scott Wingo tied the decline to yet another round of changes last March to the way items are listed and priced.

Early on, sellers were reporting that the listing changes in particular were hurting their sales. Even worse, according to Wingo, the new search results appear to be confusing buyers — for some reason (Wingo himself says he’s baffled) serving up many more auctioned items rather than fixed-price ones. Which is sort of the opposite of what Donahoe was going for.

In Donahoe’s defense, Whitman steered eBay from one of the most dynamic and successful startups in the history of Silicon Valley into a fragmented, sclerotic tech company. Her handling of the Skype deal left eBay paying too much for a company that had little in common with its other businesses, and didn’t even buy control of its P2P technology. After buying StumbleUpon in 2007, eBay smothered the innovative startup under its wings. As Om noted recently, StumbleUpon has thrived since eBay spun it off.

I’ve long wondered whether eBay wouldn’t be better off broken up into pieces. If the turnaround continues to fizzle out, I suspect investors will lose patience and agree. Even some who are bullish on the stock because it’s undervalued acknowledge that the company is worth more than the sum of its parts.

If so, why not sell off each piece to companies that can offer more compatibility than the tepid synergy that eBay’s fragmented empire has tried to create? eBay’s marketplace with a global reach would be a tight fit with another retail giant. It’s hard to imagine Amazon (s AMZN) making a bid, but the growing Japanese e-tailer Rakuten has been on a buying spree, most recently picking up

Similarly, PayPal might better achieve the ambitions — outlined by Donahoe at the D8 conference this month — of becoming a payment provider for digital content if the subsidiary were bought by a company that was just starting to move into selling and streaming content like music. A company like, say, Google (s GOOG), which right now strikes me as a better partner for PayPal than eBay’s stagnant bulk inventory marketplace.

Whatever value remains in PayPal and other properties like StubHub will continue to be weighted down by the eBay marketplace business — a business that is, according to ThinkEquity analyst Aaron Kessler, continuing to lose market share. If Donahoe can’t jump-start the recovery of the marketplace soon, he may be hearing more calls for him to unlock the company’s hidden value by breaking it up.

Image courtesy of Wikimedia Commons.