Anyone care to speculate with us as to why?

Just weeks ago Carl Icahn went after eBay with a vengeance seldom seen even among acerbic activist investors, and demanded the company spinoff PayPal. He charged CEO John Donahoe with “inexcusable incompetence” and leveled serious accusations of conflict of interest against directors Marc Andreessen and Scott Cook. Icahn notified the company that he intended to nominate two directors, and to propose a non-binding resolution that would have shareholders vote on the spinoff at the annual meeting next month.

Last week it all went away. eBay added corporate darling David Dorman to the BoD, evidently at Icahn’s suggestion. Icahn withdrew his nominees and proposal.

We speculate that Icahn couldn’t win over other investors. He got what blessed little he could, and moved on. It’s a good lesson for all activist investors: talk to other shareholders first.

When we last left them...

Icahn owns about 2% of eBay’s shares - enough to get the company’s attention, but not nearly enough to change things without help from other shareholders.

Amid the mudslinging, and at the suggestion of J.P. Morgan banker Jimmy Lee, Icahn and Donohoe met for a total of eight hours (says Icahn) during the first week of April. Quite suddenly, on April 10 eBay announced that Dorman would join the BoD, and Icahn would withdraw his proposals. According to Andreessen, Dorman and he go way back, so Icahn apparently endorsed the same insular governance he slammed just weeks ago.

Icahn provided abundant comment that day, in numerous interviews and a news release with eBay. He mostly points to how Donohoe’s commitment to the company won him over. Despite all the quotes, Icahn doesn’t give us much to work with in discerning what really happened.

In one way this development makes no sense. Icahn continues to maintain, even in the news release from eBay, that eBay should spinoff PayPal “at some point in the near future.” So, after eight hours of confidential discussions with the CEO, he didn’t change his mind about his basic thesis for the company. What gives?

Other investors hold the key

Icahn and eBay both solicited shareholders heavily, with numerous proxy filings in March and April. Notably, eBay has a detailed website setting forth the case to keep PayPal. Icahn has his own website, which details his governance complaints against eBay, but has nothing at all about why eBay should spinoff PayPal.

In one of his many interviews the day they settled, Icahn said, “[we] talked to a number of other large holders, who really believe in the CEO.” Similarly, CEO Donahoe said in an interview “[w]e felt confident we were going to win the vote.”

So, it seems to us that Icahn broke the first rule of activist investing - engage other investors early. A more interesting question is, if so, why did other investors not support him?

Not always easy to support...

We speculate, too, that other shareholders don’t necessarily flock to an investor like Icahn.

Recall Icahn has not publicized a detailed case, the “white paper” that others routinely put together. Investors would need to undertake their own analysis, and no one has time for that. Anyway, few shareholders read them thoroughly, but they want to know that the investor who wants to nominate directors and spin off businesses has thought through the situation.

Icahn has done this sort of thing before, though, so some shareholders must wonder: why not this time?

In addition, a PayPal spinoff is debatable, in the sense that it’s a big, complicated subject, worthy of debate. It’s much easier to trust an activist investor that advocates for simple, straightforward changes, like returning cash to investors, or reform of poor corp gov practices.

And, shareholders need to trust this particular investor, with an outsized reputation for fighting with other PMs, and for favoring his own interests. eBay went after him hard on this latter point, accusing him of changing his tune on BoD conflicts when it suits him.

Given his 2% stake, Icahn would need help from a number of other investors. He would also need a strong endorsement from ISS and Glass Lewis, unlikely without a solid case for the PayPal spinoff, and difficult given that he planned to nominate two Icahn Enterprises veterans for the BoD spots.

We don’t know whether a PayPal spinoff makes sense.  We can guess, though, that in light of Icahn’s continued insistence that it does, he backed off because he couldn’t persuade other shareholders to go along.