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The U.S. Justice Department is expected today to expand its antitrust investigation into eBay Inc.’s $1.5 billion acquisition of PayPal Inc., with its review focusing on whether the transaction would hurt small businesses and other payment processors. The antitrust division must issue a so-called second request, which is a formal demand for more details on the deal, within 30 days of the companies’ formally notifying it of the transaction. If it misses the deadline, the companies are free to close the deal. EBay and PayPal said in an Aug. 6 proxy statement that they started the 30-day clock July 18. The means the government must respond by the close of business today. A PayPal spokesman, Vince Sollitto, declined to comment on whether the company expected a second request. “We will know when we know,” he said. An eBay spokesman did not return a call for comment. Still, the companies appear to expect a second request. In the Aug. 6 proxy, the companies reiterated their earlier guidance that the deal is expected to close late in the fourth quarter, which seems to anticipate that they will need at least three months to answer the government’s questions. Sources said the Justice Department is investigating whether eBay could use PayPal as leverage against rival auction sites. This is known as vertical foreclosure. The antitrust division likely would challenge the deal if eBay has an incentive to make it tougher to use PayPal’s services with other auction sites or if the San Jose, Calif., Internet giant could harm rival payment providers by making it easier to use PayPal on eBay than other services. Another issue under review is whether combining PayPal with eBay’s rival Payments by Billpoint product would result in too dominant a company. PayPal is the market leader in online payment, and eBay’s Billpoint had been expected to be its major rival. The merger would eliminate that competition. Either outcome could hurt businesses that sell over the Internet but are not large enough to accept credit cards. Such businesses typically are run out of the owner’s home, and they market their products exclusively on auction Web sites like eBay. Sources said eBay and PayPal have persuasive arguments against both objections, though the companies will be unlikely to avoid the second request. That is because the deal is large enough and controversial enough that prosecutors are expected to feel compelled to seek more details to ensure the deal is not anti-competitive. “There is a high degree of likelihood that this will get cleared,” one lawyer said. Sollitto said PayPal is confident. “The company certainly believes that in the end the deal will get done,” he said. A source involved with the deal said the vertical foreclosure issue is a non-issue because eBay would not have any incentive to discriminate against other sites. Rather, it would want as many consumers as possible to use PayPal. Creating a pool of disgruntled consumers would just make it easier for a new entrant to erode PayPal’s advantage as the first to offer this type of payment service. As for giving PayPal preferential treatment on eBay, that may not be improper. For instance, Yahoo Inc. touts its Yahoo PayDirect on its auction site. Also, a second source said the Department of Justice could seek a commitment from eBay not to discriminate against other payment providers. This would be a conduct remedy that could be included in a consent decree and overseen either by a trustee or a federal judge. The sources said at first blush the deal could appear anti-competitive because of eBay’s and PayPal’s dominance of the e-payment sector. Though neither firm disclosed market shares, PayPal is considered the leader in the industry and was the first to facilitate payments via e-mail. With PayPal, customers establish an account and use the service to send money to others by either debiting a bank account or charging a credit card. This is especially useful to small merchants that do not accept credit cards. Yet lawyers said entry is relatively easy in this market, which means eBay would not be able to profitably increase PayPal’s prices. They noted that Yahoo PayDirect with HSBC is well-positioned, as well as a product from Citigroup Inc. Other major financial players also are scrutinizing the market. In its Aug. 6 proxy, eBay and PayPal warn that PayPal competes in an “emerging, intensely competitive” market. Among those it considers competitors are: MoneyZap and BidPay, offered by First Data Corp.’s Western Union subsidiary; Yahoo PayDirect; Citigroup’s c2it; CheckFree Corp.’s Valid; the U.S. Postal Services e-mail payment system; and credit card merchant processors such as First Data, Concord EFS, Paymentech, VeriSign and Authorize.net. One argument unlikely to sway regulators is PayPal’s contention that it also competes with traditional payment methods, such as credit cards, checks and money orders. Sources said the Justice Department is unlikely to consider these viable enough to prevent PayPal from raising prices by 5 percent, which is the usual test for determining a market. This argument, however, does not appear critical to the merger. One potential strike for the deal concerns the disclosure in the proxy that PayPal had complained to the Justice Department that eBay has acted anti-competitively to favor its payment processor over PayPal. But regulators are unlikely to have learned anything from PayPal’s complaint that it would not have heard otherwise. Also, regulatory feedback permits PayPal and eBay to better frame the merger to allay the Justice Department’s concerns, the lawyer said. EBay agreed July 8 to acquire PayPal. �Copyright 2002, The Deal, LLC. All rights reserved.

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