Recently-floated PayPal, which recently announced its first-ever quarterly profit, has been at the centre of persistent rumours of a buy-out by eBay for some time.

Under the deal, eBay will acquire all of the outstanding shares of PayPal in a tax-free, stock-for-stock transaction using a fixed exchange ratio of 0.39 eBay shares for each PayPal share. Based on eBay's stock price on 5 July, 2002, the acquisition is valued at $1.5 billion. According to preliminary estimates, the recognised purchase price is also expected to include approximately $18 million for acquisition-related costs.

PayPal, which will continue to operate as an independent brand, conducts approximately 60 per cent of its business on eBay, making it the most preferred electronic payment method among eBay users. The remaining 40% occurs primarily among small merchants who constitute a potential new audience for eBay. Likewise, eBay's community of 46 million users worldwide represents a growth opportunity for PayPal.

EBay's current payment service, eBay Payments by Billpoint, will be phased out after the close of the transaction in December 2002. Wells Fargo, an early collaborator in Billpoint, recentl picked up the mandate to provide card payment processing services to PayPal.

PayPal will continue to provide a variety of consumer services, including its popular Web Accept product, which makes it possible for independent online merchants to accept payment directly at their web sites. In view of the uncertain regulatory environment surrounding online gaming, eBay plans to phase out PayPal's gaming business after the transaction closes.

According to eBay, the integration of PayPal's payment functionality into the eBay platform will "fundamentally strengthen the user experience and allow buyers and sellers on the global online marketplace to trade with greater ease, speed and security".

Meg Whitman, president and CEO of eBay, says: "eBay and PayPal have complementary missions. We both empower people to buy and sell online. Together we can improve the user experience and make online trading more compelling."

As part of the announcement, eBay is reporting consolidated net revenues for the second quarter of approximately $266 million. GAAP net income totaled $54.3 million or $0.19 per diluted share, with a gross margin of 83% and pro forma operating margin of 30%. The company is also reporting that pro forma earnings per share was $0.19.

These stronger than expected results were highlighted by an accelerating US transaction business, which grew 48% year-over-year, combined with year-over-year growth from international operations of 148%.

PayPal's second quarter results will be announced on 24 July, 2002.