Big eBay news this am - layoffs, acquires BillMeLater (gulp)

This morning, eBay made a major multi-faceted announcement and held a conference call with analysts.

First, eBay is laying off 10% of its employees as has long been rumored. This is 1000 employees, many temporary and contractors.  This will result in $150m in annualized savings.

eBay then did a good job of lumping in a bunch of other announcements so not much attention was given to the layoffs.  In fact no information was given to the departments or nature of the folks impacted.  We'll keep an eye out for that information as it becomes available as sellers are very concerned about impact to customer service (buyer and seller).  eBay is going to take a $70-80m charge for the layoffs.

Secondly, eBay confirmed Q3 guidance, with a low-end revenue and high-end EPS view.

Thirdly, eBay announced some classified sites in Denmark for $390m.

Lastly, and definitely the biggest (and in my mind riskiest) announcement today is that eBay has acquired BillMeLater (BML).

BML is an interesting business with perhaps deeper retailer checkout penetration and TPV than off-eBay paypal.

Background on BML
BML has had a great business over the last 3 years. BML really started ramping up in 2006 and in holiday season 2007 hit its stride by offering consumers off-credit-card credit on the fly.  The way it works is a consumer goes to checkout and BML is there as a mark beside Visa/MC/Amex/etc.  When the consumer chooses BML, they enter their SSN and then are either approved or not approved.

For many consumers, if they have a high enough score, they are given 'super sized' approval (e.g. $100 in cart, $200 is approved) and thus retailers love it because it improves the average order value.  Consumers love it because:

1. It's safe - only your SSN is transmitted (personally that freaks me out more than my credit card)
2. It's 'free credit' - it isn't on your credit cards so you either
   1. Keep room on your card or
   2. if your card is maxed out, you get effectively another credit card

Industry lore is that eBay tried to buy BML last year, but BML rebuffed and said they wouldn't sell for less than $2b.  eBay decided to compete by adding similar functionality to Paypal with something called PayLater (PPPL).    As best I can tell, PPPL hasn't had any traction as it was too conservative only working on transactions in the $50-100 range and was only offered in express-checkout which has very little retailer adoption.

On the back-end, BML acquires loans from some institutional company and that's the piece I don't think anyone understands and wasn't really illuminated in the call.

BML stats
Some datapoints revealed today about BML's biz:

• BML is offered by 75 of the top 200 merchants in the IR500. 
• BML's Transaction Payment Volume (TPV) is $1b/yr (2008E) vs. 800m last year (25% y/y)
• BML's revenues are estimated to be $130m this year (meaning eBay effectively paid  7x revenue) (see my risk factors below)
• BML has a 46% repeat user rate (like a credit card once consumer gets the BML credit, if they don't use it, they can come back)
• BML has 4m registered users (vs. Paypal's 80m+)
• BML has a 12.5% take rate on TPV
• BML's profitability wasn't really detailed

The Acquisition

• eBay is acquiring BML for $820m and $125 in options
• The deal will add $150m in 09, and dilutive by $.06 on EPS
• Will be accretive by 2011 (wow, long time for a payoff)
• eBay will be assuming a $550m book of receivables (yikes, that sounds like almost all of last years TPV).
• John Donahoe said the acquisition is less than half it would have been a year ago on the conf call.

My Risk concerns around BML
BML was huge last holiday season based on our data and there's a real business there and overall I think it does make sense to be part of Paypal, long-term and it does achieve some of the strategic pieces that Donahoe covered on the call (extend to larger retailers, etc.).

However, I have three big areas of concern around BML:

• Short-term risk: In the eBay deck this am, they showed the 2008E revenue for BML at $130m.  As with any retail-based business, I'm sure at least 30% if not 40% of their revenue comes in Q4, which is front of us. If we have a slowdown, I'd guesstimate that there's a good 20-30m at risk in that 08E.
  • They then guided 150m in revenue next year for BML. Why would eBay buy something growing at 25% and then slow it down vs. accelerate?
• On the front-end (consumer facing) , I'm sure this holiday demand for 'cheap' credit will be extremely high as consumers are maxed out on their houses and credit cards.  So BML will have a lot of requests for transactions.  However, they may need to really jack up the level at which they give credit and if they don't manage that right they could either have lower than desired TPV or higher with more risk involved.
  • A second issue with the demand side is that as they raise the bar on credit, it results in a poorer consumer experience.  Right now most consumers get the credit, but imagine only 5% get it, that's a bad buyer experience and BML could get a retailer backlash if consumers put that bad experience back to the retailer.  The BML CEO admitted they do this on the call.
  • Thirdly on the front end (consumer) as consumers fall over due to the economic issues, you could see defaults rise substantially.
• Last and certainly not least.  BML on the back end (commercial lending - b2b) takes credit and issues it to consumers on a per-transaction basis.  Think of it as taking big chunks of credit ($550m out there right now I guess) and then chops it into little $100-500 chunks.  It's no secret that the credit markets are a total trainwreck and eBay just got itself squarely involved in a credit 'middle man' business.
  • I'm guessing eBay will fund this off their very healthy balance sheet and/or leverage their credit facilities.
  • What if BML is integrated in Paypal (who has $60b in TPV/yr as of Q2) and let's say they get a great adoption of 10%. That's $6b of credit.  While eBay has a pristine balance sheet, I don't know what would happen if something like this happened.  Of course eBay+BML can control this outflow of credit, but it's an interesting and important exercise to look at and understand the scale of the back-end credit piece eBay could have just bitten off.

On the call, the BML CEO referenced their years in credit as being able to mitigate this, but that didn't really allay my concerns as we face a credit world unlike any ever seen  before so how do you model that?  The CEO also insisted that it isn't credit, which didn't make any sense to me - if it quacks like a duck and walks like a duck....

I left the call feeling like this was a bailout of BML and concerns around eBay+Paypal getting into the credit business in a BIG way.  I don't know how much experience they have with that and even if they had tons of experience, they are now subject to the crazy gyrations of the credit markets.  e.g. LIBOR going up now matters to eBay and historically nobody really cared. 

Integration
The trick as with any M+A is for eBay to integrate this right.  For example, if they shutter BML and try and offer it as PayPal PayLater, that wouldn't be smart.  The Paypal team has a better history of M+A (verisign, etc.) than the rest of eBay so I think integration risk is pretty low here.

I wonder if they will report both TPVs or try to blend them and I also wonder if they will push for a Q4 integration - seems unlikely as the deal isn't even closed yet so they can't begin in earnest yet.

Amazon and BML
Last December, Amazon invested in BML and now offers it as an option.  It's going to be interesting to see if Amazon can get BML off the payment options before the holidays or will they chose to continue to partner here?

eBay platform and BML
It will be interesting to see if eBay can get BML out for the holidays and if they pass any of the benefit (free transaction payment) on to sellers or if they hose sellers over and charge them Paypal rates for something that would normally be free off-ebay.

The Bottom Line
The layoffs will probably be viewed as net positive as they will reduce costs and improve profitability going into some severe Q4/09 headwinds. The BML acquistion is one that will have to be watched closely long-term.  Short-term given the unbridled fear of the word 'credit' right now, I expect the market to punish eBay severely for this acquistion and I suspect eBay will lose much more than the $1b it paid BML in market cap in the short term as investors flee in fear from the dreaded C word.  The only thing worse timing-wise eBay could have done is announced some kind of sub-prime lending effort.

Long-term I definitely agree there are synergies in the two businesses, but I don't think we'll see them until Q409 and with the guidance BML won't even be accretive until 2011, so this is a very long-term play and right now the market isn't thinking past lunch, much less 2011.  We'll be tracking the integration very closely as it will have implications for eBay sellers both on and off eBay.

SeekingAlpha Disclosure: I am long eBay and Google

Comments

[Reality]

Seriously....this is starting to sound like a variation of that timeless funny : "Doc it hurts when I do this....and Doc says......don't do that!"

It's amazing how most of us judge everyone else by their actions but ourselves by our intentions. Common sense says put together a real business plan. If you know a Marketplace has a history ( this is called research) of randomly suspending sellers, and you don't have a buffer built into your model, who's fault is that?

Now if you are suspended, and fuss about it , and it happens again a year later, and you can't handle that either and blame everyone else...is failure really that unexpected?

At this point, most 3rd graders would recommend exploring alternative sales channels. Keeping all your eggs in one basket? Really?

Comments like " we didn’t deserve what eBay have done to us, our families and a really good business " can't be taken seriously.

Read Who Moved my Cheese, and quit blaming everyone else. Become smarter next time and get after it! Success is built on failure. Figure out what you did wrong and don't do it again.

Read Mark Cuban on Success and Motivation http://blogmaverick.com/2007/12/24/success-and-motivation/

When you've re-invented yourself, come back and share something with the rest of us. Until then, quit whining.

[Anonymous]

Sorry to hear about your story Jeremy. Just know that you are not the only one. God bless you and your family, we all wish you the best.

- Yet another titanium powerseller and channel advisor customer who will be officially out of business by March of next year.

[Jeremy Isaacs]

eBay’s latest acquisitions

On the back of an unpredictable stock market, it is only right that shareholders in eBay actually get an insight into how at a time of looking after and wrapping up in cotton wool their eBay money tree, their raping and pillaging tirade on this goose that lays golden eggs, will result in the leaving behind of a rotted carcass.

Ebay once again has decided to splash their cash, on a day when they have tried to bury bad news resulting in allegedly making redundant 10% of their workforce.
http://ebaystrategies.blogs.com

Their recklessness in spending such large amounts of cash at a time when even banks apparently don’t seem to have any is just another sickly announcement and timed to coincide with CEO Donahoe’s recent meetings with President George Bush. http://ebayinkblog.com/2008/09/30/ebay-goes-to-washington/

Oh and by the way eBay have announced today that they are also improving performance by reducing 10% of their staff.

Already the World is seeing a return on their hard earned investments. Do banks really know what they are doing and why should we do what they tell us to do!

George Bush has just pushed through a package to put billions of pounds into the banks, who will probably also be guaranteeing or even putting the money forward for eBay to push their money into a business that will no doubt as they did with Paypal end up enforcing you to use. This latest little purchase ($820 million cash and $125 million options) will, if paypal is anything to go by, aim to push debt to those left who have successfully avoided it, or possibly push even more further in it! Paypal is not an option, you cannot list an item on eBay otherwise.
So what is going to happen and where is the 10% of the staff being lost from, normally we shouldn’t really care, its got nothing to do with us right, well if you have read the above, I believe it has. Shareholders will think this is fantastic, pruning the business in such uncertain times only shows that it is being well managed. Shareholders could not be more wrong and so wide off the mark.

The problem is eBay, which is well documented in blogs, forums and within sellers revolts that eBay who have made so many major changes over the last couple of years, have made even more changes in the last 6 months. During this period businesses that were developed on the very basis that eBay was founded have either walked off or even been turned off and the so called account managers who are more than likely to be sacrificed with these cuts, have had no direction and still have no direction as to how to deal with these recent changes, it is far from comforting to see that both as a shareholder and a tax payer, who is going to have to fund the bad management of the banks and governments, whether it is now or in the future, that even as we are writing today with all the uncertainty eBay who quite clearly have not got their ship in order are funding purchases for over a billion dollars!

Finally, I am writing this article not because I read the papers, watch the news, but like every body else I am concerned that we will pick up the bill for these fat cats of industry who really do not give a monkeys uncle what happens to you and me. For the record I have my own gripes with eBay and have documented the manner in which eBay has affected us as a seller, hopefully on reading this article you will make your own minds up as to where I am coming from.

Rise and fall of E-JumbleUK on eBay

Facts and History

2006 – January

E-Jumble born as eBay facilitator from 104a Castle Street, Edgeley Stockport. Unit size 427 sq ft over two floors.

1. E-JumbleUK was set up to facilitate goods on eBay such as furniture, fittings and other used goods such as kitchens, bathrooms, bedroom suites that were too good to be skipped and placed in landfill sites. Selling predominately from customers homes with smaller items held at premises for shipping.

2006 – October

2. E-JumbleUK turnover based predominately on eBay sales had no alternative but to relocate from its original small unit to the 1st floor of a small mill (3,500 sq ft) due to sellers wanting a collection and removal service and we had no place to store. The company purchases a used transit as we recognised that if we could not collect, sellers would sooner skip or tip perfectly good items. We also recognised that we could assist smaller manufacturing/retail businesses who were looking at avenues to close their companies rather than be forced to close in the longer term, our true descriptions allowed these businesses to exit at a price they understood provided them with something, rather than receiving nothing if the businesses were forced to close. The eBay buyers were delighted that they got the opportunity to buy at such prices by buying direct, rather than buying through a trader.

2007 – April

3. Suspended from eBay for a period of 2 weeks, no warning, “MY EBAY” screen goes down with all buyer and sales information, causing unnecessary chaos and we do not understand as to why. Eventually we contact eBay who in a roundabout manner inform us that we are selling something we shouldn’t be, however they apologise to us saying it was a drastic measure on their behalf and they will do whatever they can to get us back on ASAP. We find the problem was caused by a specific can opener produced in the UK to be sold solely in the US which had been unknowingly given to sell.
We immediately contacted the MD of the company who made the can opener and explained what had happened, he was genuinely upset for us as he did not intend for such drastic measures to happen. Our account manager assures us that he will make sure such drastic measures do not happen again and even insists that eBay will themselves relist all items back on our eBay selling site to help us. eBay themselves relist everything again INCLUDING the can openers that caused the offence in the first place! In all we were off eBay for a period of 2 weeks, with cash flow affected for up to four weeks.

May 2007 to July 2007

4. Demand for our services is coming in as we have recommendations from both sellers and buyers, and we have noticed that we are gaining regular buyers visiting us from all around the UK to pick up their purchases and view what we had running on auction.
From a stand still start with no contacts our accounts show a turnover of
£275,000 in the first years trade, furthermore we are offered the top floor of
the mill and ground floor on a flexible basis to encourage our business to
grow.

August 2007to June 2008

5. E-Jumble is taking off, turnover has increased dramatically with further interest and business coming in from larger companies looking to dispose of overstocks and idle assets. Our overheads are also going up, however controlled and systems being built to make the business more efficient. However the business has no bank borrowings or overdraft facility and is slowly increasing its profit margins.
Furthermore expansion is set in place as the result of successful negotiations E-JumbleUK agree to merge with Wicklow based and established Irish companies Tara General and Dynamic group to develop the profile and set up trading in modern warehousing facilities in Wicklow, just outside of Dublin. Logistics are put in place and due to the nature of the set up we relocate our UK operation from its smaller 3 storey property (with small lift) for loading larger heavier items to a larger single floor modern warehouse under one mile away in Stockport, with the directors committing to a lengthy lease. The process would make logistics between the UK and the Wicklow warehouse easier and quicker to deal with. E-JumbleUK and E-Jumble.IE recruit a further 12 eBay listers, warehouse staff and drivers to operate between both businesses, with training to operate both E-Jumble’s software procedures and eBay’s, the recruits are trained for all health and safety issues that would arise in a warehouse operation, fork lift truck licences and even first aid. All 12 operators are salaried and trained for 3 months to commence the anglo UK and Irish venture to begin September 08.

July 2008

6. E-JumbleUK announces accounts showing profitability in only the second year trading giving it the perfect platform. With demand for services on the increase, it also announces that the trading for the May, June and July period was running at around £100k turnover a month. New systems are also in place to coincide with deliveries and warehousing, stock inventory barcoding systems in place and we are able to locate items quicker for our buyers.
Unfortunately however whilst we had emailed all buyers who had purchased through our eBay site that we were moving, we were receiving record number of negative feedback, which also coincided with neutrals being treated as a negative, (a situation which eBay then rectified and changed how they were treating a neutral). We were still experiencing problems to eBays recent feedback changes, we were being left negatives without having an opportunity to rectify matters all follow up complaints and whilst we were endeavouring to deal with complaints, our record of low negatives, were then running at over the eBay new charter. We were also receiving higher positive feedback than ever as well and relatively even today over the period as a whole 12 months our negative position still remains at 1.32% of total feedback.

August 2008

7. Goods coming in due to the new modern warehouse and new barcoding inventory systems are being dealt with more efficient and are being listed almost immediately. Health and safety has been passed and we are resolving all our teething problems of such a major move, which also coincided with a busy previous 3 months. We expected a seasonal dip in turnover for August, however what we did not expect was that we would again be suspended by eBay. Again as last April and without any warnings we were removed from eBay, however this time we were informed that we would be removed for 30 days. (that is no cash flow for 30 days) 22 people to pay salaries to and rent to pay on our modern warehouse, no trade, no income. Our committed crime was that we had for the previous month more negative feedback than was accepted by eBay. We were dumbfounded, how do you deal with people who left four negative feedbacks as they had bought four items and were dissatisfied with one of the items they paid just over £10 for, relating to our listing stating approximately 35 bottles of liquid soap and four weeks later decided to report us to eBay and leave negative feedback for only collecting 34 bottles even though they signed for the items “as described on ebay”, or how do you respond to buyers that contact us to say that there is a damage on an item you posted and will accept £20 off and then they will not leave a negative, even then when we try to respond to the matter by asking for it to be returned, it is still held against us as we didn’t just give them what they wanted, which was £20 off for something that we never got the opportunity to view, do not forget this item was auctioned at a 99p start and described in an accurate manner.

Unfortunately for the staff we had to let the majority of our workforce go immediately, due to the immediate reaction to eBay we also had to contact our Irish counterparts to inform them that whilst we had this problem not only have we had to release the new recruited members and invested in, it meant that we could not proceed with E-Jumble I.E. They were also furious as they had also invested in premises in Ireland as well as recruiting sales staff over in Dublin and around Southern Ireland to bring in the business, their reaction was extremely furious as the money they had invested on in securing premises which as of now remains vacant together with racking and warehousing facilities, they were upset due to an American company being allowed to set up in Ireland on the basis that they do not pay their taxes and not allowing its UK company to trade and also for being responsible for causing the unnecessary unemployment of so many people in a business that was due to commence business in September, especially on the back of so many people due to the credit crunch and recession already being made redundant in Ireland. This company who collectively through their various business interests employ a lot of people already in Ireland and who pay their taxes are having to not only make people redundant, but also lose money on the back of a foreign company residing in Ireland to avoid paying taxes.

E-Jumble has always prided itself on customer service and buyer satisfaction and remain confident with ‘what cannot speak cannot lie, it wants its customers both sellers on whom they have returned other wise land fill fodder into much cash to know the truth, by reading all the feedback both good, bad and indifferent and read into it what they will, and at the end of the day, it has always been the buyers that decide and thankfully, when it reads that 1 in every 2.6 buyers come back to buy again, ‘what cannot speak really cannot lie’, every single feedback always tells a story and if buyers did not want to buy they really wouldn’t, as it is there for the next buyer to see. We remain positive that common sense will prevail and eBay recognise that the various principles in which eBay was founded have been adhered to by E-JumbleUK, and that it was always down for the buyers to pay what they wanted to pay, with all terms and conditions for buying clearly stated throughout all transactions.

Also, eBay always promote communication between the buyer and seller when they do not take their own advice as trying to get hold of your account manager in times of need or even to get them to respond to an e-mail is difficult. In the past when you had issues on your account, the account manager would ring up and discuss the issues to prevent any action being taken. Now ebay take action and your account manager goes into hiding. The only time you hear from account managers is when they want to promote a new policy, tell you how they are doing you a favour by reducing insertion fees (missing out that they are hiking final value fees).

Unfortunately as a business it appears the present management and staff are allowing the minority of crank customers, to spoil it for the majority and in trying to appease these minorities of jealous, conniving schemers, they will be left with buy it nows of retail prices and excuse the vulgarity of dirty knickers, farts in a bottle and photographs of empty buildings in Europe for sale with an excuse as to why there is no deeds included. eBay are allowing a brilliant and one time innovative idea for people around the globe to generally offer for sale what was to be discarded or surplus to requirements by way of a true genuine auction process to losing direction and genuine sellers.

What will be left after we have gone and how long it will continue for who really knows, however the response, best wishes and general support from nearly 3000 eBay buyers have caused a tear or two. We know that this support alone shows that what we created was worthwhile and not an altogether waste of time, if perhaps something that will in the end cost us dearly and whatever our fate is from now on, we can hold our heads up and know that we didn’t deserve what eBay have done to us, our families and a really good business.

Jeremy Isaacs
Managing Director
e-jumble Limited

0161 476 3497