EBay and PayPal to Separate as Independent Companies in 2015 Following demands from high-profile, activist investor Carl Icahn, fast-growing payments business PayPal will be a standalone company by mid next year.

EBay Inc said it would spin off PayPal, its fast-growing payments business, into a publicly traded company in the second half of 2015, marking an about-face for the company.

The news of the tax-free spinoff to shareholders sent eBay's shares up 10 percent to $58.15 in premarket trading.

EBay Chief Executive John Donahoe had previously resisted demands by activist investor Carl Icahn to hive off the service, saying PayPal was integral to eBay's business, and vice versa.

Icahn, eBay's sixth-largest shareholder with a 2.48 percent stake as of June 30, backed off from his demand in April. He also withdrew his two nominees to eBay's board, but in a concession, the company added a 10th independent director.

Donahoe acknowledged in an interview with the New York Times on Tuesday that eBay was following Icahn's recommended strategy. But he contended the company arrived at its conclusion through "a deliberate process" and not by reacting to outside pressure.

"A thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively," Donahoe said in a statement.

EBay said revenue in its marketplaces and enterprise businesses increased 10 percent to $9.9 billion in the last four quarters, while PayPal's revenue rose 19 percent to $7.2 billion.

"By separating marketplace and PayPal, it could make marketplace more attractive as an acquisition, which is something that investors have been thinking about since Alibaba's IPO," PiperJaffray analysts wrote in a research note.

After the spinoff, the new eBay will be headed by Devin Wenig, president of eBay marketplaces and former head of the markets division of Thomson Reuters Corp.

PayPal's chief executive after the spinoff will be Dan Schulman, former head of American Express Co's online and mobile payment business.

EBay's CEO Donahoe and Chief Financial Officer Bob Swan will oversee the separation and serve on the boards of both companies.

The PayPal business faces competition from Google Inc's Google Wallet and a number of other vendors. Apple Inc. is scheduled to enter the online payments market next month with its newly unveiled service, Apple Pay.

"On PayPal, investors will still contemplate the risk of PayPal directly competing with Apple Pay and Google Wallet, which will likely add some uncertainty to PayPal's standalone valuation," PiperJaffray analysts said.

EBay had a market value of $65.36 billion as of Monday's close.

PayPal was founded in the late 1990s and went public in 2002. It was acquired by eBay soon afterward for $1.5 billion.

PayPal has more than 152 million active users and accounts grew 15 percent last quarter.

(Additional reporting by Liana B. Baker in New York; Editing by Savio D'Souza)