Elliot Management Going After PayPal: Playing Matchmaker Or Shotgun Wedding?

Elliot Management is a storied activist investor. They have shaken up a number of errant stocks over the years. They’re not known for long-term investment and guidance to raise the profitability like a Nelson Peltz of Trian Fame. Rather they’re there to kick the target company in the … shins and make some moves to return shareholder value quickly. Sell off or spin out divisions, or sell the whole kit and kaboodle to a buyer for a short-term payoff. This is only possible when the target company has failed in advancing its long-term value anyway. If a target does have a demonstrated ability to execute and has put forward a credible plan for the future, then Elliott Management would be repelled. However, if a company is clearly unable to elaborate on the “vision thing” Elliot Management could very well pull off a quick sale. It could even get it sold at a bargain basement price as long as they bought significantly under that the agreed-upon sale. Elliott need only offer a few dinero higher to satisfy the short-term traders and investors who are in the stock because they followed Elliott into the target. They’re already expecting a quick hit, and they’re ready to move on to the next target of the activists. It also helps immensely if the founding CEO has shuffled off the stage. Are you scratching your head yet? Surely I can’t be referring to PayPal (NASDAQ:PYPL), and no I am not.

So if I am not talking about PYPL what am I talking about?

Surely I can’t be the only one that remembers that Elliott also is an activist in Pinterest (NYSE:PINS). Yes, perhaps now the title of this piece is becoming clearer. PYPL has way too large a market cap and it still does have institutions that remain long-term yet very unhappy investors. It’s PINS whose founder vacated the CEO position. Also very conveniently you may recall the “rumors” that the CEO of PYPL was pitching woo to PINS. This move was roundly criticized at the time, and the blowback was so fierce that Dan Schulmann disavowed all knowledge of the acquisition. The damage was done and the PYPL stock proceeded to roll over and never regained altitude. The bearish rationale for rejecting the PYPL and PINS union was that it range too far in wanting to acquire a social network. What’s more, they really object to acquiring one that had nothing to do with payments. The shorts joined in with the assertion that it must mean that PYPL is desperate for revenue. I think there was some willful ignorance at play here.

The bears got it right but not about PINS

Perhaps the bears just smelled that PYPL was about to stink up the joint. So when they had little patience for the idea, share owners of PYPL also refused to give Schulman the benefit of the doubt. So what’s the rationale? The future for PINS is a unique way to reveal buyer intent or even a demographic that could be nurtured to become engaged with the product. This is a rare niche for a social network PINS to occupy in fact I bet there will be comments that PINS is not a social network at all. The problem with its execution of a business model was that it was nothing special. The founder of PINS Ben Silverman took the low-hanging fruit for advertisement, and perhaps sponsored links. The real value prop is to be able to click on any Pin, see all the relevant features, and create a shopping cart. This would nearly replicate a value proposition more akin to Amazon (AMZN) or Shopify (SHOP), or more familiarly eBay (EBAY)! PYPL sorely missed the revenue that came from eBay. The fly in the ointment was that Ben Silverman was not up to the task, so there was no demonstrable ability to create all the software to automatically identify the product, locate the maker and apply for a drop-ship relationship or some other way to fulfill the product. If there’s no response find as close an offering as possible to the Pin and connect the shopping ability to that alternative and so on. Perhaps understanding the underlying AI and other technology to make this happen in a cost-effective way was beyond his ken. Perhaps he was happy to capture the ad revenue to be able to get the company public and that was as far as his ambition took him. Let’s be more charitable and say that the AI capability was just not there at the time. Now when software developers are claiming that an AI instance had consciousness I suspect that the ability I describe is now here. If this isn’t an opportunity to recreate eBay the “minimum value product” is to offer this capability to makers and distributors that are always looking for new ways to engage customers directly. I could see deals for a bigger slice than just referral fees. There could be all kinds of programming to attract celebrities and content creators. A large corporation that has the resources could really make Pinterest into a credible and very special e-commerce value proposition.

A great new business story that comes cheap, and easy

At this point, PINS is priced right, and PYPL had better present a new road map for growth. With Elliott Management going out there to explain the value to investors I think at this point the PINS deal would be welcome. Easy in the sense that the founder is no longer in the CEO seat. If PINS can make this pivot without upsetting the current user base I think an acquisition of PINs would be a master stroke. At the time PYPL was rumored to have made an offer for PINS at $45B. At the time of this writing, the market cap of PINS is $11B so at this point PINS is a tastier morsel. PYPL laid out $4B for the Honey app, which facilitates discount deals and coupons. PINS as I conceive of it’s certainly a tremendous value at the $11B plus a couple billion for premium to the investors to make the deal happen. Under PYPL, they could invest in raising the value, advertise PINS to reverse the loss of DAU. They could set about revamping the engineering department of PINS which basically a low-tech business. With the right vision and more aggressive goal setting PINS might be considered a great investment in just a few years.

My trade here is simple, I opened a long position in PINS. At some point, I would consider shorting PYPL.

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