SAN FRANCISCO/NEW YORK (Reuters) - EBay Inc said it will cut 10 percent of its work force and spend about $1.3 billion to buy online payment and classified companies to counter a slowdown in its main web auctions business.
Shares of eBay fell by as much as 12 percent on Monday, their lowest level in more than five years, after the company also said third-quarter revenue would hit the low end of its forecast. Shares clawed their way back to close at $17.89, down $1.05 or 5.5 percent, on the Nasdaq.
Investors are concerned the U.S. housing slump, higher fuel prices and a growing financial crisis are taking a greater toll on eBay’s auctions.
Some also questioned one of eBay’s purchases, Bill Me Later, which offers consumers deferred payments and financing promotions, as the credit crisis grips global markets.
The most significant layoffs in the San Jose, California-based company’s history will affect about 1,000 employees and 600 temporary workers, across a variety of jobs and locations at eBay and PayPal, its online payments service.
The reduction is expected to incur restructuring charges of about $70 million to $80 million, mostly in the fourth quarter, but save $150 million annually thereafter.
Chief Executive John Donahoe told Reuters the company would reinvest resources into its auctions business, whether through lower prices, coupons or improving user experience. It would also plow the proceeds into higher-growth areas like PayPal and classifieds.
“This is not in any way tied to the short term. This is tied to simplifying the organization...to compete over 12 to 18 months,” Donahoe said. “This is a time when eBay is putting its foot on the gas in terms of investing for future growth.”
Auctions growth has slowed in the last few years, with a wealth of online deals at other sites and greater competition from the likes of online retailer Amazon.com Inc, which has cut into eBay’s market share.
In the past year, the company lowered its up-front listing fees to lure more sellers and offered more fixed-price listings, which appeal to buyers. EBay also increased fraud protections and incentives such as coupons.
Pacific Crest analyst Steve Weinstein called the job cuts “responsible”. He predicted that sales in eBay’s U.S. auctions business will have declined from a year ago when they report on October 15.
“If you can’t fix your top line, you have to address the cost structure,” Weinstein said. The cost-cutting, he said, was “a positive happening amid some broader negatives. Yes, this is a good thing, but a declining core business is worse.”
For the third quarter, eBay expected to hit the low end of its revenue forecast of $2.1 billion to $2.15 billion. But it said it would exceed the high end of its earnings forecast range of 39 cents to 41 cents per share, before items.
Donahoe said the job cuts and acquisitions should make eBay more nimble and draw buyers to its site for the holiday shopping season.
“We anticipate a fairly competitive holiday season where consumers will be looking to save that extra buck,” Donahoe said. “Similarly, there are people who will be looking to make a little more money, to sell something.”
EBay said it would buy the U.S.-based Bill Me Later payments service for about $820 million in cash and $125 million in options.
The No 2 online payments player will be combined with PayPal and is expected to generate $150 million in revenue in 2009. EBay sees the deal closing in the fourth quarter and adding to earnings in 2011, while reducing operating earnings per share by 3 cents in the current fiscal year’s fourth quarter and by 6 cents in 2009.
EBay executives noted the deal price would have been double that sum a year earlier, and that Bill Me Later’s features can appeal to consumers any economy.
“You can have a wonderful credit business that continues to operate in a down market,” said PayPal President Scott Thompson, who will oversee the unit.
When asked about the risks of any exposure to credit issues, Thompson said Bill Me Later was very selective in offering one-time deferred payment options to consumers.
EBay is also buying Danish online classifieds businesses Den Bla Avis and BilBasen for about $390 million, adding to a global portfolio of classified ad sites.
Sanford C. Bernstein analyst Jeffrey Lindsay said investors were concerned about the deals eating into eBay earnings, but that the acquisitions should help the company strategically.
“In the current environment, people will find it more difficult to get credit to buy things online. Provided they manage the risk carefully, Bill Me Later gives an excellent alternative,” he said. “It might give a way that people will prefer to buy on eBay rather than go somewhere else.”
Reporting by Martinne Geller and Alexandria Sage; Editing by Derek Caney, Maureen Bavdek, Dave Zimmerman, Leslie Gevirtz