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  eBay to Buy PayPal; Will Restrictions Follow?
>> By Eric Black

July 15, 2002

PALO ALTO, Calif. - Last week's announcement by Internet auction giant eBay that its pending acquisition of PayPal Inc. would mean the latter's exit from the online gaming arena caused some adult Internet entrepreneurs to raise their eyebrows while others merely shrugged.

The announcement followed by days eBay's release of a letter of intent to purchase PayPal for $1.5 billion. Among other things, PayPal provides "payment by email" services for adult Websites.

Eric J. White, founder of and chief technology officer for adult toy manufacturer Virtual Reality Innovations Inc., has had mostly pleasant experiences as a client of both the online auction site and the payment provider. Still, the thought of having both under a single umbrella worries him, despite assurances from sources close to PayPal that the company does not intend to abandon the adult market.

"It concerns me that eBay is absorbing PayPal," White said. "eBay has not been a friend to the adult industry. After the online gambling is gone from PayPal, will the adult industry be next?"

As one of the largest and most profitable sites on the Internet, eBay has diligently cultivated a wholesome corporate image. Though some of its users traffic in adult wares, they do so under restrictive guidelines. With PayPal expected to move under eBay?s corporate umbrella early next year - pending approval by the U.S. Justice Department - the legal and financial fallout for PayPal's adult clients may take a while to settle.

The president of Dreamrock Digital, a developer known as "MX," said he also feels eBay's gambit may have implicatioons for the adult Internet. With the merger proposal in play, the waters have become murkier for those settling transactions through PayPal, he said: "As more and more adult entertainers start operating their own Websites, other credit card processors like iBill will most definitely start feeling the heat from players like PayPal [because of its expanded backing from eBay]."

MX also noted, however, that "EBay's community of 46 million users worldwide represents a growth opportunity for PayPal, so this is a win-win situation for [both of the companies]."

Although PayPal estimated that about 50 percent of its revenues are derived from eBay transactions, Rajiv Dutta, eBay's chief financial officer, said the figure was closer to 60 percent. eBay's acquisition of the four-year-old payment-processing firm will be instrumental in the auction site's realization of its 2005 revenue goal of $3 billion, he predicted.

Outside the adult online industry, not everyone is happy with the proposed merger, either. Last week in a Delaware court, PayPal shareholder Kathleen Rooney filed papers seeking an injunction against the acquisition. Rooney's filing was followed quickly by a similar one by fellow shareholder Louis Crespo, who is seeking class-action status for his suit.

Both legal actions allege the eBay/PayPal merger represents a breach of the companies' fiduciary duty to shareholders, and that the price eBay is paying for PayPal is unfair and inadequate.

Before its Feb. 8 initial public offering, PayPal had reported a small operating profit. In June, PayPal forecast its second quarter earnings revenue at nearly $54 million.


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