How PayPal went from Wall Street favorite to unwilling merger target

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July 20 (Reuters) - Five years ago PayPal was a Wall Street favorite and a leader in digital payments. Since then the stock has plunged, Apple Pay dominates payment services in the U.S. and PayPal is facing a takeover bid it does not like. What happens next?

The company synonymous with digital payments this past week got a $53 billion offer to be taken private by upstart rival Stripe and buyout shop Advent International. PayPal's board is discussing the bid but believes $60.50 a share is not enough, people familiar with the company said.

It is a comedown for a company that helped to pioneer e-commerce and email-based payments, launching the careers of tech titans Elon Musk and Peter Thiel in the process. Founded in 1998, the San Jose, California, firm was acquired by eBay in 2002 and spun off as an independent company in 2015. Continued growth pushed its market value as high as $360 billion in 2021.

But since then its growth has slowed and competition intensified, while multiple attempts in recent years to jumpstart its business have borne little fruit.

Dealmakers are now weighing the value of PayPal's sprawling payments ecosystem, from its 400 million-plus consumer accounts to its merchant checkout business, raising the question of whether the company is worth more as a single entity or as a collection of assets, such as the Venmo peer-to-peer payment app, that could be sold off in pieces.

In February, when the company named a new CEO, it acknowledged a need to address its position relative to competitors and within the broader industry landscape.

"While some progress has been made in a number of areas over the last two years, the pace of change and execution was not in line with the Board's expectations," it said in a statement.

Enrique Lores, who took over as CEO in March, has not commented on whether PayPal would pursue a sale.

While bigger rivals such as Apple , Google and Samsung and upstarts including Stripe and Affirm relentlessly rolled out new ways for consumers and businesses to pay for goods and services, analysts say PayPal was slow to explore opportunities in digital banking and commerce, or to offer fresh options when more people were using their phones to pay.

"Why bother becoming a digital bank if you can just be the world's biggest checkout button?" said Dan Dolev, senior analyst at Mizuho. "I think it was too easy to drink the honey straight from the checkout jar."

Investors and industry executives are frustrated with PayPal's performance, said one source familiar with the company's deliberations. PayPal started before the iPhone even existed, but last year Apple Pay's U.S. market share exceeded PayPal's by 10 percentage points, according to PYMNTS Intelligence, a research company.

PayPal has also lagged many rivals in adopting AI and pushing into agentic commerce, in which AI agents negotiate and complete purchases on a user's behalf.

Owen Lau, an analyst at financial services firm Clear Street in New York, said PayPal prioritized winning market share by pricing aggressively, but failed to charge enough to generate attractive returns. Clear Street began coverage of PayPal this past week with a hold rating and a price target of $61 a share, compared with a $57.09 stock price on Friday.

Lau added that growth has slowed across key parts of the business, including Venmo, while newer products such as buy now, pay later have not panned out. PayPal's user base has plateaued, he said, making growth a secondary concern to boosting profits from existing customers.

"They just want to win market share," he said. "They're not charging appropriately, and they're losing momentum in other parts of the business."

The company has had three CEOs in four years and this March embarked on its second turnaround effort since longtime chief Dan Schulman stepped aside in 2023.