Could there still be a deal between Pinterest and PayPal? – The colorful fool | Vette Leader

Do you remember when PayPal Stocks (PYPL 0.20%) was reportedly interested in a takeover Pinterest (PINS -0.17%) At the end of last year? It’s a good thing it didn’t work. The two stocks have since fallen during the 2022 bear market, with each down about 70% from all-time highs hit the previous summer. At the time, Pinterest was valued at over $40 billion, so given everything that’s happened since the first news of a possible deal, PayPal would have ended up grossly overpaying. Pinterest is now just a $15 billion company.

However, both stocks rebounded after gains in the second quarter of 2022 after it was announced that private equity firm Elliott Management had taken a large stake in PayPal and Pinterest. Will there be another merger deal soon?

Don’t rule out some kind of deal

Elliott Management is no stranger to mergers and acquisitions. For example, the private equity firm made headlines back in 2019 when it received loans for preservation AT&T to cut spending to refocus on its mobile network. The company dumped stock in late 2020, only to buy it again in early 2021 before AT&T formalizes a merger between its Time Warner subsidiary and Discovery — a company it now names Warner Bros. Discovery. Elliott made some money from these deals, but neither stock has performed well for buy-and-hold shareholders.

Data from YCharts.

Even closer to a PayPal-Pinterest combo is Elliott’s work with eBay. In early 2019, Elliott Management sent a letter to the e-commerce marketplace recommending a refocus on its core business. eBay’s overhaul in recent years has included its split from none other than PayPal (announced in 2020), giving eBay room to work on its own digital payments system instead (via a partnership with adyen). Elliott made a tidy profit on eBay thanks to these moves. There are other examples of Elliott’s activist activities in recent years with mixed results.

What role will Elliott play in this PayPal and Pinterest mess? PayPal relies heavily on e-commerce operations for its digital payment applications, and getting more online shopping activity into its pipeline will be key to its continued expansion. Revenue is expected to rise a modest 10% this year to about $27.85 billion.

As for Pinterest, it’s no secret that the company is trying to become a much more robust e-commerce platform, rather than being a simple social media and visual search brand. Expanding functionality for merchants with advertising and video content tools will be key, but adding a way to sell products and collect payments directly on Pinterest could also be part of the plan. Some sort of partnership with PayPal may be in the offing, and new CEO Bill Ready (a former PayPal exec) no doubt has some ideas too.

Pinterest currently expects revenue to increase by only a mid-single-digit percentage in the third quarter of 2022 compared to 2021.

How shareholder-friendly would M&A be?

Mega mergers, especially those between companies that don’t have much in common, can get messy. If Elliott is pushing for some sort of deal between Pinterest and PayPal, I’d assume he’s beneficial to both stocks in the near term. That would give the private equity firm time to dump one (or both) stocks for a quick profit and then move its capital to greener pastures.

The best-case scenario, though, is that PayPal and Pinterest form some sort of partnership that would add value to shareholders of both companies over time. A full takeover of Pinterest by PayPal could work. PayPal had $15.6 billion in cash and equivalents and $10.6 billion in debt at the end of June, allowing it to close a deal with a combination of cash and new debt or cash and new PayPal stock. But bringing the two companies together could be tricky, and it would take years to fully realize the value of the two companies’ combination. Based on recent history, it doesn’t seem like Elliott Management’s style to hold positions for many years when it comes to its activist investing habits.

With the heightened uncertainty right now, I’m not so sure PayPal is such a great long-term buy-and-hold solution if it decides to shell out cash and stock to acquire Pinterest. I’m inclined to say that PayPal would be better off than it is right now. It’s working its way through the slowdown from the early e-commerce shopping boom of the pandemic and is still highly profitable. The company has generated free cash flow margins of nearly 20% over the past year.

On the downside, Pinterest is smaller, and as such, its issues might be easier to fix in order to get revenue back into growth mode. Pinterest also boasts an even higher free cash flow margin of 25%. Perhaps it could generate even higher cash rates as part of PayPal, but that path is fraught with uncertainty. In any case, Pinterest and PayPal shareholders now find themselves in an interesting wait-and-see scenario. Stay tuned for any announced suggestions from Elliott Management for a way forward for these two troubled stocks.

Nicholas Rossolillo and his clients have positions in PayPal Holdings and Pinterest. The Motley Fool has positions in and recommends Adyen NV, PayPal Holdings, and Pinterest. The Motley Fool recommends Adyen, Warner Bros. Discovery, Inc., and eBay and recommends the following options: Short October 2022 $50 calls on eBay. The Motley Fool has a disclosure policy.

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