Yahoo-eBay Rumors Show Importance of Billpoint

Rumors of an alliance or merger with Yahoo  sent eBay (EBAY) shares up more than 10% in after-hours trading Tuesday, but it's premature to talk about any deal.

Such a pact has been whispered about for months, but the story only heated up after CNBC reported that the two online giants were in serious talks about a marketing alliance or, less likely, an outright merger. The Financial Times, however, cited inside sources as saying that preliminary talks between the two companies ended last week.

These talks appear to mean that Yahoo is throwing in the towel on its attempt to create an online auction community to rival eBay's. Since Yahoo and Amazon.com (AMZN) jumped on the online auction bandwagon a year ago, they have attracted mediocre audiences and failed to check eBay's dominance.

EBay's 10 million loyal users are certainly attractive to a company like Yahoo, but a bigger prize may be Billpoint, the online payment system that eBay recently unveiled in collaboration with Wells Fargo (WFC).

EBay has said that it expects Billpoint to be a major revenue driver, and optimism about Billpoint has been the main factor in eBay's stunning 40% rise over the past few weeks. While optimism about the profit potential of e-commerce has been overblown, a system like Billpoint, which gives eBay a slice of each online transaction without requiring it to handle any merchandise, will likely be a cash cow. Even if the talks with Yahoo go nowhere, eBay is likely to find itself the subject of more takeover rumors in the future.