The old activist push against eBay Inc. (NASDAQ: EBAY) to spin out PayPal is now even closer to taking form. In 2014, eBay decided to separate the PayPal and eBay units into two separate entities. A new SEC filing shows more detail on the terms and conditions of this split-up. Make no mistake here, the companies are going to keep some efforts together. Still, the terms are being partially shown for what to expect in the years ahead.

24/7 Wall St. has taken some of the guts of the filing to show some of the terms of the PayPal and eBay separation and agreements together ahead. We also showed some of the old 2002 terms to reveal how much growth there has been. Needless to say, it has been exponential growth.

What is interesting here is that PayPal still has not yet decided (or determined) if they will list on either the Nasdaq or New York Stock Exchange. PayPal has also yet to pick a ticker. As a reminder, PayPal used to be its own public company before eBay acquired it. Its old stock ticker was PYPL. Will we see that stock ticker return?

PayPal’s financials showed that the total payment volume in 2014 (TPV) was approximately $235 billion. That represents growth of 26% over 2013. At the same time, payment transactions were approximately 4.0 billion, representing growth of 22% from the previous year.

Speaking of the old 2002 merger agreement, here is what eBay said about its acquisition of PayPal at the time:

A natural extension of eBay’s trading platform, the acquisition supports the company’s mission to create an efficient global online marketplace. Payment is a vital function in trading on eBay and integrating PayPal’s functionality into the eBay platform will fundamentally strengthen the user experience and allow buyers and sellers to trade with greater ease, speed and safety.

Based on eBay’s stock price on July 5, 2002, the acquisition was being valued at a mere $1.5 billion — based on the deal being for 0.39 shares of eBay for every share of PayPal in 2002. Now, fast forward to 2015 and the value is exponentially higher:

• Second quarter of 2002: The guidance for the period, 13 years ago, showed that PayPal’s estimate revenue would be between $53 million and $54 million for the quarter, and eBay’s second-quarter guidance was for revenues to be $266 million in revenues.
• Fiscal 2014: eBay (with PayPal and eBay combined) reported a total of $17.9 billion in revenue and $3.51 billion in operating income. The PayPal filing showed that its pro forma annual revenues were $8.01 billion with operating income of $1.22 billion.

Again, there has been exponential growth going back to the 2002 deal announcement, when eBay acquired PayPal.

According to the PayPal filing from Thursday:

In 2014, approximately 162 million active customer accounts processed payments on our platform. Total payment volume over the last 12 months increased by 26% to $235 billion, as more consumers and merchants trusted PayPal to pay and get paid. We have significant global reach, processing transactions in more than 200 markets, allowing our customers to receive payments in more than 100 currencies, withdraw funds to their bank accounts in 57 currencies and hold balances in their PayPal accounts in 26 currencies. We are a leader in mobile payments and processed nearly 1 billion mobile transactions in 2014 for our customers.

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If you go back to 2002, roughly 60% of PayPal’s business was shown to be on eBay, and the remaining 40% was from small merchants. eBay’s community at the time was 46 million users worldwide. eBay had previously acquired Billpoint long before its acquisition of PayPal, and then it was to phase out Billpoint as part of the PayPal deal.

24/7 Wall St. has taken much more detail direct from the PayPal filing to show the terms of the operating agreement. We also included details about the non-compete agreement, joint product development, data sharing and the term and termination to show how long the companies would be tied up with each other to keep eBay’s operations seamless.

Included below are some of the dollar amounts that would be paid, what some of the percentages would be regarding splits and other verbatim details from the PayPal filing. Please be advised that some of the details still look outstanding and were not finalized because the exact revenues are not known ahead of time. Portions of the Operating Agreement below are also verbatim, and they do include mobile.

PayPal and eBay will enter into an operating agreement that governs certain aspects of the relationship between the parties following the separation, including certain terms and conditions relating to PayPal’s provision of payment processing and credit services, and other related services, to customers on eBay.com and certain eBay Marketplaces properties. The agreement will initially cover eBay.com and other core eBay Marketplaces properties in the most significant geographic jurisdictions in which eBay Marketplaces is offered, including but not limited to the United States, Australia, Canada, Germany, and the United Kingdom, as well as cross-border trade with buyers on those core eBay Marketplaces properties covered by the agreement, specifically including cross border trade with China and all countries in Latin America, but will not include domestic trade in China and Latin America; domestic or cross-border trade in Russia, India, and all other non-eBay Covered Jurisdictions; or other eBay properties, such as StubHub, eBay Enterprise, Magento, Classifieds, Shopping.com, Gmarket, or Half.com.

The operating agreement will require PayPal to offer comparable eBay merchants pricing for PayPal’s payment services in the lowest twentieth percentile of rates charged to comparable non-eBay merchants, as defined in the agreement. Characteristics used to determine comparability include the mix of PayPal product(s) used by the customer, the geographic market in which the customer is located, the customer’s industry, the nature of the customer’s business, the total volume of transactions (by PayPal product), the average size of the customer’s transactions, the financial condition of the customer and the customer’s credit profile. Therefore, the PayPal rates for eBay merchants will remain largely consistent with today’s pricing relationship. On an annual basis, the parties will retain a third party independent auditor to conduct a market check on a jurisdiction-by-jurisdiction basis to ensure that eBay merchants are receiving pricing as required under the agreement. In addition, subject to certain exceptions, in the event that PayPal offers to non-eBay merchants who use or access PayPal’s services through websites or applications operated by a specified “Competitive Platform Operator” of eBay any term that is more favorable than the terms currently offered to eBay merchants in an eBay Covered Jurisdiction. PayPal shall offer such terms, along with all other directly related terms and conditions, to eBay for the benefit of comparable eBay merchants, and eBay shall have an opportunity to determine to accept, and to comply with, the related conditions with which eBay or eBay Merchants is reasonably capable of complying.

In addition, during the term of the operating agreement, PayPal will make certain payments to eBay based on certain referral services by eBay that have benefitted PayPal in the past and that the companies intend to continue following separation. Subject to the Penetration Rate (as defined below) remaining above 60% at the beginning of each quarter, PayPal will pay a referral services fee to eBay (calculated quarterly and paid annually) in an amount of $[—] per quarter. It is anticipated that the number of new PayPal users who are introduced through the eBay platform will remain consistent with current experience. In the event that the number of new users introduced to PayPal in this manner increases or decreases from the expected rate, the referral services fee will be adjusted accordingly. In addition, PayPal will make a payment (calculated quarterly and paid annually) to eBay based on the use of PayPal Credit by eBay consumers and merchants on eBay properties equal to 0.30% of the Net TPV completed on eBay through PayPal Credit.

PayPal and/or eBay will also make certain payments to each other based on the usage of PayPal’s payment services (including PayPal wallet, guest checkout with credit card, and any other payments processed by PayPal) by eBay consumers and merchants on the eBay Covered Properties. These payments are intended to provide an incentive to eBay to support the continued use of PayPal as a payment service on eBay Covered Properties (referred to as the “Penetration Rate”) at current levels and to reward eBay if Penetration Rates on eBay Covered Properties increase. The agreement will provide for a baseline Penetration Rate on eBay Covered Properties of 80% (the “Baseline Rate”), which is approximately equal to the current Penetration Rate prior to the separation. For each percentage point that the Penetration Rate exceeds the Baseline Rate, PayPal will make a payment to eBay at an annualized rate of $13 million. The payment amount will be determined on a quarterly basis by multiplying (a) the amount by which the Penetration Rate exceeds the Baseline Rate for the quarter, rounded to the nearest hundredth, by (b) $3.25 million. In the event the Penetration Rate falls below the Baseline Rate by an amount up to 5 percent, eBay will make a payment to PayPal at an annualized rate of $13 million per percentage point decline. The payment amount will be determined on a quarterly basis by multiplying (y) the amount by which the Penetration Rate falls below Baseline Rate for the quarter, rounded to the nearest hundredth, by (z) $3.25 million. In the event the Penetration Rate falls below the Baseline Rate by an amount in excess of five percent, eBay will make a payment to PayPal at an annualized rate of $13 million per percentage point for the first five points below the Baseline Rate, and an additional $50 million per percentage point (at an annualized rate) for any additional amount below the Baseline Rate. The payment amount will be determined on a quarterly basis according to the following formula: $16.25 million plus ((a) $12.5 million times (b) (the Baseline Rate minus the eBay Penetration Rate minus 5%, rounded to the nearest hundredth of a percentage point). The foregoing payments will be made annually based on the sum of the calculated quarterly amounts. The agreement also provides that, for those PayPal products made available on the eBay platform, in the event that PayPal’s TPV for customers other than eBay falls below established minimum thresholds, eBay would no longer be obligated to make any payments in respect of the Penetration Rates to PayPal.

Subject to certain exceptions, the operating agreement will also provide that eBay will not declare itself as the single merchant of record for transactions effected through any service or offering available on eBay Covered Properties unless PayPal is acquired by certain specified competitors of eBay. For purposes of the agreement, the term “Merchant of Record” means the entity that PayPal holds financially liable for all full and partial returns as well as any chargebacks initiated by the customer. In the event that PayPal is acquired by certain specified competitors of eBay, eBay may elect to become a merchant of record by giving written notice to PayPal within 90 days of the consummation of such acquisition, and such election would become effective on a date specified by eBay that is between 15 and 21 months after the consummation of such acquisition.

Additional details about the noncompete agreement, joint product development, data sharing and the term and termination are verbatim from the filing as follows:

NON-COMPETE — Subject to certain exceptions, eBay and its controlled affiliates will be prohibited from directly or indirectly engaging in the business of marketing, distributing, promoting or selling its own proprietary payment solutions for use on the eBay Covered Properties, and PayPal and its controlled affiliates will be prohibited from directly or indirectly engaging in the business of marketing, distributing, promoting or selling its own proprietary marketplace offering for the sale of physical goods. These restrictions will continue for the term of the operating agreement.

PRODUCT DEVELOPMENT — The operating agreement will provide for eBay and PayPal to enter into a product development agreement that requires eBay and PayPal to mutually discuss in good faith and agree on a product development plan for optimizing the PayPal experience on eBay Covered Properties and to invest development resources in other strategic initiatives related to the provision of payment processing and credit services by PayPal. PayPal and eBay will agree in the product development agreement to commit certain resources and development staff to the projects included in the product development plan.

DATA SHARING — The operating agreement will also provide for eBay and PayPal to enter into data sharing agreements pursuant to which eBay and its subsidiaries, on the one hand, and PayPal and its subsidiaries, on the other hand, will share information for risk, trust and fraud modeling and customer service operations in a manner consistent with current usage and in conformance with legal and regulatory requirements. Neither party will be permitted to use such data for any purpose beyond the scope of the agreement without entering into a separate, arms length commercial arrangement that is in compliance with legal and regulatory requirements.

TERM & TERMINATION — The operating agreement will have an initial term of 5 years following the distribution date and will be renewable by mutual agreement for successive 1-year terms. At the expiration of the operating agreement, there will be a 1-year tail period during which the provisions of the agreement will continue to apply, subject to certain exceptions. During the 1-year tail period and for up to 1-year after the termination of the agreement for a material breach, the parties will use reasonable best efforts to cooperate in good faith to transition off of the services provided under the agreement, with such cooperation reimbursed by the other party at cost. During the term of the operating agreement, both parties can mutually decide to amend the agreement as appropriate. In addition, either party will be able to terminate for certain uncured material breaches.

FULL PAYPAL FILING

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