Online payment service Paypal proved it had legs when it went public in February, 2001 at $13 a share, and July 2002 the whole enchilada paid off as eBay agreed to pay $1.5 billion for Paypal, already used by lots of buyers and sellers at the giant auction site. eBay acquired  all of the outstanding shares of PayPal in a tax-free, stock-for-stock transaction using a fixed exchange ratio of 0.39 eBay shares for each PayPal share. Based on eBay's stock price on July 5, 2002, the acquisition was valued at $1.5 billion.

That values PayPal at about $23.61 per share based on eBay's closing price of $60.55. PayPal closed Friday at $20, down from its all-time high of $30 plus a share. eBay paid a premium of about 18 percent for PayPal.

On the PayPal deal, which many analysts had been expecting because of the obvious synergy, eBay CEO Meg Whitman said: "eBay and PayPal have complementary missions. We both empower people to buy and sell online. Together we can improve the user experience and make online trading more compelling..."

Companies can learn from the eBay’s acquisition strategy to use creative financing techniques, such as stock-for-stock transaction by effectively using its current stock price as a media to accommodate a buyer who would otherwise be reluctant.

Cite this as:

YouSigma. (2008). "Ebay’s Stock-for-Stock Acquisition Strategy." From http://www.yousigma.com.