eBay Aims Mobile Carrier Billing

E-commerce service provider, eBay Inc. (EBAYAnalyst Report) has agreed to acquire a Chinese mobile carrier billing payment company Zong for $240 million in cash. The transaction is expected to close in the third quarter of 2011 and is pending Chinese regulatory approval. According to a new Chinese regulation, foreign ownership is restricted in e-payment companies, so eBay might face some issues.

Zong provides a mobile payment platform through direct carrier billing. Consumers can easily pay for their purchases from mobile phones or computers by entering their mobile phone number, which is then verified by Zong. Subsequently, the payment is cleared on the customer’s existing mobile service account.

eBay’s existing payment platform, PayPal, enables individuals or businesses with an email address to send and receive payments online. Currently, Paypal handles around $10 million a day in mobile payments and expects to transact more than $3 billion in mobile payments in 2011. PayPal processed about $3.4 billion in digital goods purchases last year.

This acquisition will empower PayPal’s existing payment system and support its position in mobile payments and digital goods. Zong lets consumers pay for virtual goods such as game credits on Facebook Inc. Now it will aid PayPal in hugely attracting online transactions such as streaming movies and newspaper subscriptions, thereby increasing digital revenue.

Zong has massive international reach. The company currently serves 3.2 billion users in 21 languages, across 45 countries and has connections with over 250 mobile network operators. As a result, this acquisition will diversify and widen eBay’s international base. It will also allow PayPal to expand its footprint in those countries where internet connection is poor. In such cases, people might use their mobile phones to pay for their purchases.

eBay is one of the largest online retailers in the world and appears well positioned to grow through strategic acquisitions. In order to maintain its strong position in the online market and fight growing competition, eBay made three more acquisitions in 2011. GSI Commerce was acquired for $2.4 billion, Magento for an undisclosed sum and WHERE Inc. for $135 million. We believe these acquisitions will help eBay to expand its business, increase sales and provide a competitive edge over Amazon.Com Inc. (AMZNAnalyst Report) and Google Inc. (GOOGAnalyst Report) which recently launched its digital Wallet.

The company reported a modest first quarter, with gross revenue of $2.55 billion, which surpassed our expectation by 2.8% and also improved both year over year and sequentially. The revenue improvement in the last quarter was largely on account of an upswing in PayPal performance. PayPal revenue from transactions as well as revenue per user showed a strong growth year over year. However, the acquisition is not expected to have any material impact on its financial guidance for the second quarter issued in April.

We are maintaining our Neutral rating over the long term (6–12 months). Currently, eBay shares carry a Zacks #3 Rank, indicating a short-term Hold recommendation.

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