EBay and PayPal to split into two separately traded companies

EBay CEO: Why we're spinning off PayPal
EBay CEO: Why we're spinning off PayPal

After spending much of this year explaining why its two businesses are best left together, eBay's board of directors and CEO did a complete about-face Tuesday morning, announcing a plan under which its PayPal and eBay marketplace businesses will be split into separately traded public companies by the middle of next year. And CEO John Donahoe will step down as CEO of eBay once the split takes effect in 2015.

EBay shares jumped on the news, rising by more than 7 percent by midday. They were on pace for their best day since July 19, 2012, when they rose 8.6 percent. (Get the latest quote here.)

Donahoe began 2014 under pressure from activist investor Carl Icahn to split the company into its faster growing payments business, PayPal, and its legacy e-commerce marketplace, eBay. Donahoe and eBay's board successfully resisted those pleas in winning a proxy fight, but only months later during the company's annual strategic review, decided that a split in 2015 is now the right move to position each of those company's for the future.

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"What the proxy fight forced was me to come out and articulate our plan of record, our position at that moment, and that's what I did," Donahoe told CNBC, "As we've continued our annual assessment, looking forward three to five years about how we can best position eBay and PayPal, we think the competitive position and the competitive environment of commerce and payments are going through accelerating change. That creates new sets of opportunities and challenges for both eBay and PayPal and (we believe) that operating independently will give eBay and PayPal focused strategic flexibility and an ability to move quickly and decisively in this changing environment."

In a tweet, Icahn said he liked the announcement.

@Carl_C_Icahn: Happy about spin off of PayPal. Read more on my thoughts concerning future of $EBAY at Shareholders' Square Table:

While Donahoe has spent much of 2014 extolling the benefits that eBay and PayPal derive from being part of one company, he now says those benefits are in decline."When you look forward, eBay will be less than 15 percent of Paypal's business three years from now and we can achieve many of the benefits of the synergies through arms-length commercial relationships." Donahoe told CNBC.

Who could bid for eBay?
Who could bid for eBay?

Devin Wenig, currently president of eBay Marketplaces, will become CEO of the new eBay when the split becomes final. EBay also announced that it has hired Dan Schulman, currently the president of the Enterprise Growth Group at American Express, to take over as PayPal's president immediately. Schulman will become PayPal's CEO once the split from eBay is complete.

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While Donahoe expects to become a board member of both companies, his decision to no longer run either of them is a surprise. Donahoe says that by the middle of 2015 when the split is expected to become official, it will be time for him to step aside.

"I had a good role model named Meg Whitman. When Meg was CEO of eBay, she said she was going to do it for a decade. And she stepped down eight years ago in her early 50s and created opportunity for me, for which I'm enormously grateful. Next year will be my 10th year at eBay and I'll be creating opportunity for two great leaders to become CEO," Donahoe told CNBC in an interview.

While eBay's 180 degree turn is sure to be seen by some as placating a restless shareholder base and avoiding what could have been another bruising proxy fight, Donahoe says that is simply not true. "Very consciously we didn't make a reactive decision in Q1 based on a short term event like a proxy fight because we have a long history of being thoughtful and deliberate of how do we set this business up to succeed over the long term. From the beginning, Pierre Omidyar, our founder, has a deep commitment to the long term. ... And this process has gone through what is the best way to help eBay and PayPal succeed over the long term. I feel confident this is the right direction and that's the reason we're pursuing it."

Read MoreIcahn: Pleased with eBay split, more work needed