Apple-PayPal: A Match Made in Heaven?

On Tuesday, September 30, eBay Inc. finally succumbed to the demands of activist investor, Carl Icahn, and decided to separate its eBay and PayPal businesses into independent public companies in 2015. However, even before the split has occurred, reports are abuzz on PayPal being an ideal takeover target for companies trying to enter the lucrative mobile payments industry.

The mobile-payments industry is entering into an extremely competitive phase. The latest entrant is Apple, with its mobile payment service; Apple Pay (not iPay!). A host of retail giants, which include McDonald’s, Whole Foods, and Macy’s have already signed up to allow their customers to pay via Apple Pay. Mobile payments in the US alone are expected to touch approximately $118 billion by 2018 from $3.5 billion in 2014, according to EMarketer. This competitive and challenging environment is what prompted the eBay-PayPal split, says John Donahoe, eBay’s current CEO (He is expected to step down as CEO post the split, but will stay as a board member in one or both the independence companies).  

And this is also why companies like Google, Alibaba, and to some extent, Facebook will weigh the opportunity to acquire PayPal. Google is seeking a second chance to enter the online payment industry post the failure of Google Wallet. Alibaba is seeking to enter the United States following its blockbuster IPO, and wants to expand its payment service, Alipay. Facebook has already prized away PayPal’s former President, David Marcus, as it plans to venture into the world of mobile payments.

But the ideal suitor for PayPal, in my opinion, and this might surprise many, is Apple! One can argue that Apple has already launched Apple Pay, and this has become the reason, if many reports are to be believed, for eBay to separate PayPal in the first place.

So why should Apple acquire PayPal? For starters, PayPal has 152.5 million active registered users at present. Secondly, post the split, PayPal is expected to be debt-free as eBay has planned to keep its entire debt, which amounts to $7.5 billion, with its Marketplace business. The acquisition of a debt-free, hugely popular company, who also happens to be an expert in online payments, can help Apple gain a foothold in the industry. Above all, Apple is known to revolutionize every industry it enters (the iPod, iPhone, and iPad being key examples). Investors have been waiting for the “next big thing” for quite a while now. The acquisition of PayPal and its subsequent integration into Apple Pay could take Apple on the brink of revolutionizing the mobile payments industry.

So how much will the acquisition of PayPal cost Apple? PayPal has a potential market cap of $31.5 billion and according to Gene Munster, an analyst at Piper Jaffray, PayPal alone could cost between $50 billion and $62 billion. If Apple can splurge $3 billion on Beats Electronics, then any value in the range of $50 billion and $62 billion for a company that can help Apple leapfrog its competitors in an industry poised for a 34 fold rise in the US alone, will be money well paid.

The question, then arises, as to why PayPal should agree to be acquired by Apple? After all, it sees Apple as a threat, and a direct competitor. Also, Apple Pay is yet to be launched, and still hasn’t been successful, whereas PayPal is hugely popular among consumers. But if were to be successful, then it has the potential to could destroy PayPal. And there is more than one reason as to why the winds are blowing in the direction of Apple. A recent article on ABC news compared both Apple Pay and PayPal. The key takeaway from the comparison is the issue of security. Apple Pay, unlike PayPal, does not store the user’s private information, but makes use of the device account number assigned by the Phone’s Passbook, and a dynamic security code. In short, Apple Pay offers a more secure method of payment, and therein lies its potential success. Therefore, it is only inevitable that the current growth of PayPal declines and eventually it gets usurped by Apple. After all, as the old idiom goes, “If you can’t beat them, join them.”

Apple Pay has still not been launched, eBay still has not split, and it is very early days to even contemplate whether Apple will ever acquire PayPal. Although the more likely candidates for acquiring PayPal, that is, if PayPal does plan to be acquired, are Google, and Alibaba, the thought of Apple acquiring PayPal does sound enticing, and it has all the potential to become a match made in heaven!