Does PayPal Have a Buyer?

**Travis Hoium** (0:02)
PayPal may finally have a buyer. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Lou Whiteman and Rachel Warren. And guys, we may finally have a deal for the company that has been kind of on the block, kind of a value stock, kind of a what in the world are they doing their PayPal. So Rachel, what did we find out this morning and overnight about Stripe potentially buying the company?

**Rachel Warren** (0:31)
A major breaking news report. So payments giant Stripe and private equity firm Avid International have reportedly submitted a joint confidential proposal to buy PayPal for $60.50 a share. That would value PayPal at over $53 billion. As of the stock's closing price yesterday, that was a 28% premium based on their share price at the time. The deal is reportedly backed by about $50 billion and committed bank financing. Now, what's interesting about this is under the terms of the proposal, both Stripe and Advent would take equal stakes to run PayPal as a 50-50 joint partnership. And the idea would be to keep the company intact rather than breaking it up or selling off its core assets. Going back to that $53 billion valuation based on the reported terms of the offer, this is tracking to be larger than the years ago Musk's purchase of Twitter for $44 billion. But it also really highlights how far PayPal has fallen from its pandemic era peak back in 2021 I mean, back in those days, it posted a market cap of about $360 billion. This is interesting, right? I mean, this is in the middle of what some might call kind of a chaotic internal transition for PayPal. They've got the new president and CEO. He's been pushing a turnaround plan targeting over a billion in cost savings. Now for Stripe, this is still a private company. We've heard a lot of reports that they might go public in the last few years. Their private valuation is reportedly around $160 billion.
So absorbing PayPal could really be a massive way to scale their footprint. Obviously, grants them access to hundreds of millions of active consumer accounts. It would match that consumer brand that PayPal has with Stripe's backend developer infrastructure. It could also hand them a place within the digital currency race as they absorb PayPal's stable coin into their ecosystem. Now, we haven't seen any response from PayPal, formally responding to these initial overtures. Wall Street seemed happy in early trading, but there's still a lot that we don't know, guys.

**Travis Hoium** (2:20)
Yeah, Lou, that is the thing here is if you squint, some of this makes a little bit of sense, but then you look at the structure, 50-50 deal, Stripe is buying PayPal and not can exactly fold it into your current business, at least seamlessly. This also puts Stripe in a little bit of a strange position because a lot of the payment companies have built on top of Stripe and now you're a competitor with PayPal. What should we think about this strategically and how does the private equity piece of this play into it in your mind?

**Lou Whiteman** (2:51)
Yeah, a lot of thoughts here. I mean, for once, so Stripe is kind of building their own PayPal, so I guess they don't worry about the competition as much as I do. I think you're right. I think that would be kind of an awkward conversation, but they either feel like they have to get there, so they just need to or they're not worried about that. But here's the thing, there is value in PayPal. There really is. It's a good brand. I don't particularly like the stock. I don't think this is going to work. For one thing, you're always with these things. Somebody leaked it, who leaked it, and it's the acquirers who leaked it.
The offer was made a month ago or so. This is to try and...

**Travis Hoium** (3:25)
That was the other thing that stuck out to me is it's apparently been on the table for a while.

**Lou Whiteman** (3:29)
Yeah, this is trying to light a fire under PayPal to get a response. And here's the thing, the value in PayPal for me right now is their cash flow, $6 billion of free cash flow. This is a mature company. This is a company that I don't think has a natural pathway for growth. It makes sense to take it private. The advent side of this deal makes all the sense of the world. Use that cash flow to pay down the debt you take on and create value that way. That's just Private Equity 101 There's a tension here though, right? Because a private equity firm has a different motivation and a different set of goals than a growthy fintech. And this 50-50 partnership, if done right, I guess is possible. But there is some inherent tension of running it for advance needs versus running it for whatever reason. Stripe thinks they need it. It's not impossible, but there's a lot of ways you can go wrong. I think PayPal will reject this. The other thing to note here is because they're such a mature company, about 75% of their ownership is institutional. And I'll be honest with you, if I was sitting at that desk, I don't want to own PayPal personally. But if I was one of those institutional holders and I was looking at that cash flow, I would want at least 80 It starts with 80 So I don't think, and I could be way off here, but I don't think for the people who matter, if the shareholders that could pressure PayPal to the table, I think there's still a long way to go before this makes sense.