PayPal: Reduced from a Silicon Valley Legend to an Acquisition Target

The Birth and Glory of the 'PayPal Mafia' That Dominated Silicon Valley

The history of PayPal began in December 1998 with 'Confinity,' co-founded by Max Levchin, Peter Thiel, and Luke Nosek. Later, in March 2000, it laid its current foundation through a swift merger with X.com, a financial services company led by Elon Musk. Those who led PayPal in its early days later grew into heavyweight tech entrepreneurs like Elon Musk and Peter Thiel, and their tight-knit network that holds sway over Silicon Valley became an industry legend known as the 'PayPal Mafia.'

Growing by innovatively solving security and fraud issues, PayPal leaped forward as a global payment service when it was acquired by eBay for $1.5 billion in 2002, and later spun off again as an independent company in 2015. During the pandemic, it continued to experience dazzling growth, reigning as Wall Street's favorite digital payment market leader as its market capitalization soared to a staggering $360 billion in 2021.

Stagnation and Endless Fall Brought on by Complacency

However, the splendid glory did not last long. In recent years, PayPal's growth has noticeably slowed, and competitors like Apple Pay and Google Pay have surged fiercely. In particular, Apple Pay's market share in the U.S. market surpassed PayPal by 10 percentage points last year. Dan Dolev, a senior analyst at Mizuho, pointed out that PayPal was "too complacent just sucking honey out of the honeypot of the checkout button," criticizing the company for lagging behind in seeking new opportunities in digital banking and commerce.

As a result, over the past 12 months, PayPal's market value evaporated by more than 40%, and its market capitalization plummeted to the $36 billion mark, one-tenth of its former peak. New CEO Enrique Lores, who took office in March this year, has embarked on a massive turnaround effort to simplify the business structure and focus on growth, but the situation remains challenging.

A $53 Billion Acquisition Offer and the Potential Birth of a Giant Payment Behemoth

Amid this daunting crisis, the market is fluctuating wildly as competitor Stripe and private equity firm Advent International proposed an acquisition of PayPal for approximately $53 billion (about $60.50 per share). This is a price with a premium of about 28% over the closing price before the acquisition news broke, and the acquirers have already secured $50 billion in financing from banks. If this proposal is successful, Stripe and Advent will own an equal half-stake each without selling and breaking up PayPal.

However, PayPal's board of directors has currently dismissed this proposal, judging that the price of $60.50 per share does not sufficiently reflect the company's value. William Blair analyst Andrew Jeffrey predicted that PayPal's new CEO will not accept such a low-ball offer, and that the acquirers may have to return to the negotiating table by raising the acquisition price to $70 per share.

If the combination of the two companies is realized, Stripe, which specializes in merchant business, and PayPal, which has over 430 million consumer accounts and the Venmo network, will merge into one, creating the largest global online payment behemoth in history that processes $3.7 trillion in payment volume annually. In addition, it can reduce fees by lowering its dependence on card processors like Visa and Mastercard through its own network, and it is expected to have a massive ripple effect in the virtual asset payment market as PayPal's own stablecoin (PYUSD) and the crypto payment platform Bridge acquired by Stripe are combined.

The attention of the global financial IT industry is focused on how PayPal, once the darling of Wall Street and now reduced to an involuntary takeover target, will defend against this unwanted massive buyout proposal, or whether it will use it as a bargaining chip to draw out a higher valuation.