On the same day the public markets are tanking because of the spreading credit crisis, we see one of the biggest M&A exits of the year with eBay acquiring Bill Me Later for $945 million ($820 million in cash, plus an extra $125 million in options). The only other tech exits of this size in 2008 were Sun buying MYSQL for $1 billion (which involved less cash and more options), AOL buying Bebo for $850 million. This is for a company that lets consumers defer payment when they buy things online. Remember, loose credit is part of the reason we are in the current economic mess.
So is Bill Me Later part of the problem or part of the solution? I put that question to Michael Kwatinetz, the former Wall Street tech analyst who is now a partner at Azure Capital, the biggest shareholder in Bill Me Later. He explained to me how Bill Me Later works, and how it actually has more stringent credit controls than most credit cards:
The problem is people who can’t afford to pay for things are financing things. If you have the proper controls, you don’t allow that to happen.
We don’t grant credit limits. We grant credit on a transaction basis. If you are somebody who is not paying us, or running up your bills in other places, we don’t grant credit.
Traditional credit cards, in contrast, let you run up your bill up to a pre-determined credit limit. With each transaction, BillMeLater check your credit score, credit outsanding, status with credit agencies, and a few other criteria. And it either approves your credit or it doesn’t for each purchase in less than three seconds. Kwatinetz says that the company tightened its lending policies about a year ago, and claims that the nonpayment rate is “probably the lowest of anyone on the Web.”
The value of the company lies in its algorithms that determine credit risk and in its ability to use the Internet as a platform for granting credit. All of the data that its algorithms consider is pulled in via Web APIs from credit agencies and other data providers.
For eBay, Bill Me Later will help expand its Paypal franchise to consumer credit. Bill Me Later is already used all over the Web by more than four million customers at places like Amazon, the Apple Store, JetBlue, and Walmart,com. This year the company is expected to finance $1 billion worth of online purchases and bring in $125 million in revenues. Revenues are estimated to be $150 million in 2009 (a 20 percent growth rate), but the acquisition will also be dilutive to eBay’s earnings, meaning the business is not yet profitable on a net income basis.
Still, you can see the appeal of an all-online credit service. Traditional credit card companies pay about $150 for each customer who signs up for a new Visa or Mastercard, and it usually takes a coupel weeks to process each account through the mail. Bill Me Later acquires customers pretty much instantly at the time of purchase for less than 10 percent of what it costs the credit card companies.
Announcing a large acquisition like this that is essentially a foray into the troubled credit markets may seem counterintuitive, but after a string of deals that didn’t make much sense for eBay (Skype, StumbleUpon), this could end up being one of its smartest non-core acquisitions since Paypal.
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My question is how long will competitors stick around if eBay owns ‘em? contracts, yeah, but many will have takeover outs…. does Amazon want an eBay as a vendor?
For multiple purchases I wonder if this affects your credit score? We all know that multiple credit checks within a certain timeframe results in red flags on your credit score.
Exactly, if people aren’t aware of this, then using this service repeatedly in a month can really hurt you. Kids who are just starting out, in college can really screw themselves if they aren’t careful.
No, that’s now how credit bureaus work. Once you have a relationship with an institution, they can pull your bureau without it impacting your score. The “hard pull” at time of account set up is what dings you. Pretty much every financial relationship you have is constantly updating your credit profile and you never even know it.
IPU!
Well, I know I won’t use it. All those credit checks will screw my credit score even worse than it already is
how about taxmelater.com?
Industry innovation will not make the crisis worse. But don’t worry, our cowardly leaders are on the case.
Definitely it’s a part of the problem. It’s a related business to auction transactions. It’s could be a good timing for eBay since the valuation is low and consumers might need it more than ever. Although it could also be bad if:
1) credit market is too tight and only available to a limited number of purchases/consumers
2) consumer confidence crashes (only accept cash and only cash, use their debit card)
Man, I misread the valuation, at $950M, it’s not a good deal
Cruchbase has it wrong…the company is based in Timonium, MD. Looks like the mailing address is in Omaha.
billmelater is part of the problem. credit is killing this country… akin to individual credit markets in 15th century London. difference is you can get away with defaulting today… back then, you were tossed into the local pen and left to starve.
no question there’s a business there though :-).
That’s why you need to play it safe !!
Avoid online purchase and try to shake your legs a bit.
Looking at these revenue multiples, LinkedIn is a steal for $1B!
I’m sorry but Azure Capital’s response is mostly PR spin and non-credit savvy folks shouldn’t believe it for a second. Whether you grant a “limit” or the cash for a one-time transaction, it’s still credit - ie, someone at the bank or Bill Me Later is making a credit decision to lend someone else money.
MOST IMPORTANTLY - Who is the user of Bill Me Later? Why, it’s likely people who can’t get credit cards or who are tapped out on their credit line. If you had a good credit card, why go through the trouble of signing up for Bill Me Later?
So Bill Me Later is really a tool to grease the wheels of impulsive consumer spenders who don’t have ready access to credit - one of the exact reasons we’re in this mess today.
What’s interesting about Bill Me Later is it originally came out of Nortel: http://tinyurl.com/billmelater
“EBay’s newly anointed chief executive, John Donahoe, is trying to make eBay a cleaner, safer online mall instead of a bargain basement.”
Ebay is way out of touch with reality. In this economy, aren’t we are all looking for bargain basement items?
“Bill Me Later is already used all over the Web by more than four million customers at places like Amazon, the Apple Store, JetBlue, and Walmart,com. This year the company is expected to finance $1 billion worth of online purchases and bring in $125 million in revenues”
As expected, Amazon.com says SeeYouLater to BillMeLater, so you can remove them from your list (along with some likely considerable portion of the $125MM in revenue contribution).
http://www.vendio.com/vendable.....r-in-2009/