PayPal Is Looking For A CEO Who Can Turn Its $279 Billion Stock Slide Around

PayPal Holdings Inc.'s visionary leader has been rumored to be leaving the company, whispers have been swirling.

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During late 2022, the stock had lost $279 billion in market value and shareholders were relying on Dan Schulman to help the stock recover from a yearlong slide. But after PayPal's longtime boss flew to Italy and spent four days celebrating his wedding along the shores of Lake Como, Wall Street, and Silicon Valley began buzzing with the notion that PayPal's longtime boss was ready for a change after all these years.

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John Donahoe pulled back on the speculation at the end of October: "The board has never discussed replacing Dan," he told Trade Algo. Several months later, Schulman himself announced that he would be leaving.

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So goes the humbling of the once-mighty PayPal - once worth more than Goldman Sachs Group Inc. combined with Citigroup Inc. Having made a number of strategic mistakes that could have cost the company its lead in the lucrative online payments market, the company now begins its CEO search from scratch, and the company is pondering a pivotal question: which kind of leader should lead the company, a cost-cutter or a manager with an ambitious growth plan?

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It’s no surprise that Schulman was once a replacement for the firm’s legendary founders and early executives – the so-called PayPal Mafia which included billionaires-to-be Elon Musk and Peter Thiel, as well as tech luminaries Reid Hoffman and David Sacks.

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A slew of new products was announced in 2021 by the firm's CEO that was aimed at challenging US banks. However, the firm's fortunes took an eye-watering turn after this announcement. As Schulman floated the prospect of more than doubling his client base to 1 billion, the stock market value of the company peaked at $362 billion. However, that value has mostly melted away amid a slowdown in growth, the botched bid to buy Pinterest Inc., and the abandonment of key projects.

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As headhunters compete for the mandate to find a new CEO for the company, they privately admit that finding a new CEO is a particularly difficult task. There is a buzz across Silicon Valley and Wall Street about who has the ambition to seek an interview with the top firms on the market.

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Donahoe stated in an interview that the company is looking for the best candidate it can find.” A matter of finding the right person in the right place at the right time is all that matters. That is exactly what a search accomplishes.”

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In 1998, PayPal began as a company called Confinity and rose to prominence relatively quickly when it was acquired by eBay Inc., one of the oldest and largest internet companies at that time. Over 100 million users have signed up for the payments platform as a result of that alliance.

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The investors of eBay were getting antsy by the end of 2014. Carl Icahn, an activist investor, bought a stake in PayPal and argued that if PayPal were to become independent, it would be better positioned to compete against new payment systems such as Apple Inc. and Google Inc.

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Schulman stepped into the picture. It was clear right away that he was not your typical finance chief executive: As the grandson of a union organizer in New York's garment district, he favored denim and hand-stitched boots, telling tales of how he learned the Israeli martial art of Krav Maga. While he had spent his most recent four years at American Express Co. in charge of its enterprise growth division, he was better known for his work in the wireless industry before that time.

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Growth Era

Schulman played a significant role in taking PayPal public in 2015. He then made a change that rattled investors but in the end earned him praise - making peace with credit card networks such as Visa Inc. and Mastercard Inc., which PayPal had long regarded as enemies, and had long counted as competitors.

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He hashed out a detente with PayPal over a practice known as steering in which PayPal encouraged customers to link their bank accounts to their PayPal accounts instead of using their credit cards or debit cards.

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The company first committed to offering Visa cards as a clear and equal payment option, pledging to stop encouraging Visa cardholders to link their bank accounts to PayPal wallets. PayPal investors balked at the move, sending the stock into a dive the following day after it would have to pay Visa more processing fees.

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“It was a difficult decision at the time, and it was met with a lot of skepticism at first,” Schulman said in an interview, noting that it had even been questioned by company insiders, to begin with. “It did not take long for them to come around as PayPal's volumes started to rise. It is history that proves that it was that particular decision that unleashed the growth of our company."

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In the following years, more and more card networks and financial institutions have signed similar agreements with PayPal, widening the flow of payments through PayPal's various platforms one after the other. There are more than $1.36 trillion in transactions that PayPal processes every year, up from the $282 billion that it processed in its first year as a public company.

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In Schulman's opinion, there is much to be proud of as well as much to work on, as there are many areas that still need to be improved. "We have a lot of work to do, so we have our hands full."

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With the surge in home-based shopping during the pandemic, PayPal was positioned to be one of the most valuable financial firms in the country by the start of 2021. In a meeting with investors that was held in February of that year, executives suggested that the number of active users would roughly double by the end of 2025 to 750 million. There was a constant musing about Schulman getting to the billion-dollar mark.

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It was then that setbacks began to occur. Due to EBay's rapid shift to alternative payment methods, PayPal's growth has been eroded more rapidly than executives thought it would ever be. As a result of vaccines, consumers were freed to return to the stores. As a result of the high inflation, household budgets got squeezed, which limited the discretionary spending that PayPal relies on to run its business. PayPal is rumored to be interested in buying Pinterest for $45 billion, which spooked investors as they saw the deal as a desperate attempt to grow the company.

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As Schulman also planned to add hundreds of millions of new users, his plans went awry: Last year, the company was forced to close 4.5 million accounts after it was discovered that bad actors were taking advantage of the incentives and reward programs. In the end, it abandoned its goal of increasing new sign-ups in favor of enticing existing customers to use more of its services instead of attempting to attract new ones.

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There has been a continued decline in the company's share price, which has impacted the valuations of some of its close competitors. As a result of the talks with potential investors, Stripe Inc. has been able to raise funds at a valuation that is tens of billions of dollars lower than what it achieved in its previous funding round of $95 billion.

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As a result of PayPal's slide, Elliott Investment Management has become another activist investor interested in the company.

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A number of high-profile executives began leaving, among them finance chief John Rainey, Venmo chief Darrell Esch, and omni payments chief Jim Magats, who had joined Schulman on stage in 2021. There have been a number of other departures at the company in recent months, including its chief product officer, Mark Britto, and its top accounting officer, Jeff Karbowski.

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It is not yet known which candidate will fill Schulman's shoes, but the recent departures of senior executives have left little doubt that PayPal will try to recruit an outsider to fill Schulman's shoes.

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“Investors are very happy that they are looking externally because the view is that there is no one working internally within the company,” said Lisa Ellis, an analyst at SVB MoffettNathanson. “We should not have been in this position, you would have wished we hadn't been."

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There are only a few employees within a company who are seen as viable candidates by headhunters, like Peggy Alford, who oversees the global sales force and sits on the board of Meta Platforms Inc. when it comes to brainstorming potential candidates on their own.

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“There is no certainty of any name,” PayPal spokesperson Amanda Miller said in a statement.

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Targeting Expenses

As you can see from the brevity of such a list, it shows how much even the most vocal investors were depending on Schulman to be able to figure things out. When Elliott announced its stake in the company in August, it said it was looking forward to working with the CEO as soon as possible after the announcement.

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“It has been a pleasure to work with Dan as well," said Jesse Cohn, managing partner at Elliott, in a recent interview. “The strength of Dan's leadership is evident in everything he does. I admire his strength, his thoughtfulness, and the fact that he never stands still. Having known him for a number of years, and looking forward to what he does in the future, he is a friend of mine."

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Nevertheless, in recent months, as Schulman neared the end of his 10th year at PayPal as well as the celebration of his 65th birthday, routine conversations about succession have become increasingly urgent, according to people familiar with the matter.

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Schulman plans to leave the company by the end of the year. The chairman has assured staff and shareholders that he will remain on the board for as long as the search process requires. In the meantime, he continues to rip out costs, which has meant that thousands of jobs have been cut this year, and he has recently announced that he has identified another $600 million in expenses that need to be cut.

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According to his predictions last month, the adjusted profit will climb by 18% to $4.87 a share this year, exceeding analyst expectations of $4.75.

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But that hasn't led to a turnaround in the stock, which has plummeted 7.6% further since the announcement was made. There has been a 76% drop in the stock price since it topped out in mid-2021.

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Analysts say one of the reasons for PayPal's decline is that it has been unable to shake a worry that shareholders are having: Apple.

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It was in September 2014 that Apple announced a foray into payments, the same month PayPal hired Schulman as its chief operating officer. Despite a few hiccups, Apple's Pay system is catching on, with the Apple Pay button appearing on about 28% of top retailers' websites, as it is moving in the direction of PayPal's more static 79%.

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Venmo, PayPal's popular app for making person-to-person payments, is also being challenged: In 2017, a consortium of banks developed Zelle, a rival service to make person-to-person payments that leverage PayPal's relationships with millions of customers. As a subsidiary of Square Inc., Block Inc. offers its own Cash App as well, which was originally created for small businesses such as Square.

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The head of SMBC Nikko Securities America Inc., Andrew Bauch, predicts PayPal will someday end up the subject of a Harvard Business School case study about a technology pioneer that lost an opportunity to lead the pack.

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Bauch believes PayPal's stock will underperform due to slipping through their grasp and getting lapped by so many other next-generation startups. “There will be a certain amount of blame to be placed at the feet of the CEO as a consequence of this."