PayPal’s $81M IPO Filing Strikes Many as Ill-Timed

After PayPal’s announcement Friday that it had filed to raise $80.5 million in an initial public offering, industry observers could only stop and scratch their heads. Why now?

The Palo Alto, Calif., online payment company’s decision to go public coincides with ever-lessening interest in IPOs and with warnings from analysts that the Sept. 11 terrorist attacks may have pushed the economy further toward recession. September was the first month since December 1975 when no IPOs came to market.

Analysts acknowledged they were puzzled by PayPal’s move.

“If they go public now, they’re going to be met with very lukewarm interest, if at all,” said Avivah Litan, the vice president of payment services at Gartner Inc., a research and consulting firm in Stamford, Conn.

“They’re not likely to raise very much money, and now they subject themselves to public reporting and the whole overhead of being a public company,” Ms. Litan said. “You have to ask yourself, ‘Why are they doing this?’ ”

PayPal officials would not comment on the timing of the decision because the filing has put them in an official “quiet period” with the Securities and Exchange Commission. PayPal — considered the leader in online payments — has raised $225 million in private equity financing, and it had $134.6 million of cash and short-term securities at June 30. The filing states that the company could continue its operations for another 24 months without additional financing.

“They have cash, so this doesn’t compute,” Ms. Litan said. “This is the worst possible time to file an IPO.”

Ms. Litan speculated that PayPal’s decision may have been precipitated by unsuccessful attempts to sell the company last spring. PayPal has vehemently denied that it was for sale, and it told American Banker in April that it had turned down offers from potential buyers.

PayPal had 10 million users at Sept. 1, and it processed $746.9 million of transactions in the three months ended June 30, according to the filing.

The company recorded revenue of nearly $20 million in the quarter ended June 30, up from $2.1 million a year earlier.

Its quarterly losses peaked at almost $57 million in the period ended Sept. 30, 2000, then fell in sequence to $27.7 million for the quarter ended June 30. PayPal’s cumulative loss since its founding in March 1999 is $231 million.

In the filing PayPal discusses a number of risks it faces, notably fraud. If a credit card is used fraudulently or a cardholder disputes a charge, the amount of the transaction typically is charged back to PayPal. It had $8.9 million of chargebacks from unauthorized credit card use in 2000; as a result it was fined an undisclosed amount by MasterCard International, according to the filing. PayPal also said its liability for chargebacks could cost it the right to accept credit card payments, which made up 50.5% of its transactions during the three months ended June 30.

PayPal is heavily dependent on online auctions, which are responsible for 70% of its transactions. Much of this business flows through the online auction site eBay, which has established its own competing e-payment system, called Billpoint. Other competitors, the company said in the filing, have more resources, greater name recognition, larger customer bases in affiliated businesses, or longer operating histories than PayPal.

For example, it said, Citigroup’s c2it online payment service has arrangements with AOL Time Warner and Microsoft that enable c2it to market directly to those customers — and potentially gain substantial market share in a short period.

In addition, PayPal said, its status under state, federal, and international financial regulation is unclear — especially in the areas of states’ money transmitter regulations, federal money laundering regulations, and U.S. and international regulation of Internet transactions. If it is found in violation, it could be liable to penalties.

Ian Rubin, the director of online financial services at IDC, a global technology consulting firm in Framingham, Mass., said a high level of interest in the potential of peer-to-peer computing will probably lead to competition from bigger players. “I feel pretty strongly that eventually some of the incumbents like American Express, Visa, and MasterCard will either create their own products or evolve their credit cards to do something that will compete head-to-head with PayPal,” he said.

In that environment, Mr. Rubin said, companies such as PayPal may become endangered. “P-to-P online payments are kind of in vogue right now, but I don’t see them necessarily having a long shelf life.”