EBay announced yesterday that it is acquiring GSI Commerce, pending regulatory and shareholder approval, for about $2.4bn in cash. We believe that this acquisition gives eBay four tangible benefits: 1) It helps eBay to become a more meaningful company not only for C2C and SMB sellers but also for large multi-channel retailers; 2) It helps eBay to offer fulfillment capabilities to its power sellers as a profit center; 3) It allows it to sell PayPal and BML to 180 large multi-channel retailers at GSIC, thus get access to billions in new TPV; and 4) It helps dilute Amazon's very tangible differentiation over eBay (i.e. world-class fulfillment capabilities), thus enhance buyers' online shopping experience with eBay. We expect eBay to remain an E-Commerce platform company which offers fulfillment as a service (something their business model did not allow in the past). As far as GSIC is concerned, we believe there is 40% likelihood that we have Amazon and/or Alibaba as potential bidders.

Key Points

Deal details. eBay has agreed to pay $29.25 per GSIC share in cash. The deal will be financed by cash and debt and is expected to close in mid-Q3 after regulatory and GSI shareholder approval. As part of the transaction, eBay plans to divest 100% of GSI's licensed sports merchandise business and 70% of ShopRunner and Rue La La. These assets will be sold to a newly formed holding company to be led by GSI's founder and CEO Michael Rubin. Mr. Rubin will invest $31mm of cash in the new entity while eBay will lend the holding company $467mm and retain a 30% stake in Rue La La and ShopRunner. Management expects the deal to be PF EPS neutral/ GAAP EPS negative ($0.30-$0.34 impact) in 2011 and accretive in 2012.

Expected synergies. eBay management expects the deal to generate synergies of about $60mm by 2013. As discussed on the conference call, $40mm are expected from GSI's side (G&A, payments processing, etc.), $20mm to come from higher PayPal/BML coverage and consumer adoption, and $20mm from expansion of core eBay platform. Extra costs are expected to be about $20mm for net synergies value of about $60mm. Except from cost reductions (i.e. G&A, payments processing, etc.), synergies in the deal are expected to come from enhanced platform capabilities (i.e. full-service/end-to-end E-Commerce offering), eBay's access to 180 large multi-channel retailers (GSI customers), expanded international reach, and enhanced growth opportunities for PayPal/BML.

Other considerations. Under the terms of the merger agreement, GSI Commerce may solicit acquisition proposals from third parties for a 40-day "go-shop" period which ends May 6, 2011. We believe that possible interest can come from Amazon and Taobao/Alibaba.

Implications for AMZN and DRIV. We believe that a successful closing of the GSIC acquisition will help eBay to abridge the gap vs. Amazon when it comes to end-to-end E-Commerce services and dealing with all sizes of 3rd party sellers. We also believe that GSIC's acquisition will increased the likelihood of DRIV becoming a takeout target for Amazon.

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