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The Ratings Game: Here’s what activists at Elliott Management could target at PayPal

After a rough start to the year, PayPal Holdings Inc. reportedly has caught the attention of activists in a development that’s offering some welcome relief for its beleaguered stock.

The Wall Street Journal reported late Tuesday that Elliott Management has taken a stake in the payments giant, though the story didn’t detail the size of the position. Representatives from PayPal

and Elliott didn’t respond to MarketWatch’s request for comment on the stake.

Shares of PayPal were up more than 7% in morning trading Wednesday, though they’re off 56% so far this year. PayPal has fallen out of favor with investors over the course of 2022 as the company rolled back its ambitious growth targets and said it would start prioritizing the engagement of existing users over the retention and acquisition of lapsed or new users, which marked an abrupt change in strategy.

While Elliott’s goals for its reported PayPal involvement aren’t explicitly clear, analysts saw a number of reasons why the investment firm may have wanted to get involved with PayPal, including perceived opportunities to reduce expenses and increase stock buybacks.

Wolfe Research’s Darrin Peller wrote that he sees “room for further efficiencies” on costs, even though PayPal’s non-transaction operating expenses have come down as a percentage of revenue in recent years.

“Our checks suggest that PYPL’s marketing spend and M&A [merger and acquisition] integration costs can be more efficient,” he continued, noting that PayPal’s sales and marketing expenses rose about 75% from 2019 to 2021.

Peller also suggested that Elliott might glimpse opportunities to change up PayPal’s capital structure in a way that would lead to more shareholder-friendly activity.

“With the company having relatively low leverage as of 1Q22, we believe an activist could also propose more share buybacks, utilizing a more efficient capital structure,” he wrote.

Peller further noted that “[i]nvestors have been focused on management accountability, with some suggesting the possibility of PYPL bringing on additional executives to manage operations.”

Wedbush analyst Moshe Katri was upbeat about the idea of activist involvement at PayPal, calling it “long overdue,” though he wasn’t necessarily sure that a capital-return goal would make the most sense for the company over the long run.

“While Elliott has been known to ‘urge’ management teams to returnmore capital to shareholders, we believe choosing a more patient, longer-termpath of unlocking value will be yield significantly better returns,” he wrote. Potential actions in his view could include accelerated technology investments, improvements in monetization through value-added services, and a leadership succession plan.

Several analysts highlighted that Elliott has also reportedly taken a stake in Pinterest Inc.

PayPal and Pinterest were said to be exploring a combination late last year in a move that didn’t sit well with investors, and now PayPal’s former chief operating officer, Bill Ready, is in the top post at Pinterest.

That said, the analysts were largely doubtful that Elliott would push for a deal between the two companies.

“Despite what the Street thinks, we believe a PINS/PYPL combination would be unlikely, given prior strident push back from investors,” Barclays analyst Ramsey El-Assal said in a note to clients.

“[G]iven the reception by investors following the rumors of PYPL possibly buying PINS last year…we believe such a deal would be met with skepticism,” Wolfe’s Peller wrote.

SMBC Nikko Securities America analyst Andrew Bauch, the lone bear among Wall Street analysts who follow PayPal’s stock, acknowledged that the Elliott involvement was “a sign that a valuation floor is closer than months prior,” though he added that “historically, activist investors have had difficulty creating material value in large [capitalization] tech names.”

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