The thaw between eBay Inc. and investor Carl Icahn began a month ago over dinner at the activist's New York City apartment.

EBay Chief Executive Officer John Donahoe dined there with Icahn and two other colleagues, and discussed the investor's proposal to split off the e-commerce company's PayPal payments unit. Last week, the conversation gathered steam when JPMorgan Chase & Co. Vice Chairman Jimmy Lee got involved and urged both men to talk again. That prompted a flurry of calls over the weekend, leading to Donahoe and Icahn hammering out a compromise.

"Part of what happens is you get to know someone," Donahoe, 53, said in an interview yesterday. "There's something about face-to-face business."

The meal and the momentum it brought helped cap one of the more contentious Silicon Valley investor disputes in recent years. EBay yesterday said it would bring on an additional independent director, with Icahn dropping his campaign to add two board members and force a PayPal spinoff. The agreement laid to rest months of back-and-forth that included attacks on corporate governance and personal diatribes.

The settlement got an assist from some other Silicon Valley luminaries. Donahoe said he reached out to Icahn to set up the dinner after getting advice from Apple Inc. CEO Tim Cook, who also faced pressure from the activist over the past year. Donahoe said he had other sounding boards too, including an activist, Jeffrey Ubben of ValueAct Holdings LP.

"I spent eight to 10 hours with John on the phone" over the weekend, Icahn said in a phone interview yesterday. "I believe he's passionate about the company."

The agreement marks a setback for the 78-year-old activist shareholder, who has increasingly targeted technology companies, sometimes with limited success. In 2013, Icahn failed to get Dell Inc. to dramatically raise its price in a buyout of the personal computer maker. More recently with Apple, Icahn's efforts to get the world's most valuable company to boost a buyback fell short.

Icahn said he sees the deal with eBay as a positive. The investor said he'll meet regularly with Donahoe as part of the agreement and "now we're not arguing, we're getting along real well."

EBay disclosed Icahn's stake in the San Jose, Calif.- based company in January — and the relationship quickly devolved from there. Icahn called a spinoff of PayPal, which is one of eBay's faster-growing businesses, a "no brainer" and said it was being held back by being part of an e-commerce company. Donahoe said PayPal was benefiting as a part of eBay, which could better fund the payment unit's expansion.

Within 10 days of the disclosure of Icahn's stake, Donahoe said he traveled to see at least 17 of eBay's top 20 investors and spoke with about a dozen more.

"The debate on separation was framed factually right out the gates," he said.

Throughout the process, Donahoe wanted only a handful of executives to deal with the proxy battle, including Chief Financial Officer Robert Swan and Chief Legal Counsel Michael Jacobsen. That helped other executives such as PayPal chief David Marcus stay focused on the business, Donahoe said. He also asked eBay's approximately 35,000 employees to keep concentrating on their work and not the Icahn drama.

Yet distractions kept surfacing, especially in late February when Icahn fired off a volley of attacks criticizing the online marketplace for what he called "lapses" in corporate governance. In particular, Icahn targeted eBay board members Marc Andreessen, a venture capitalist, and Intuit Inc. co-founder Scott Cook as unfit for their roles because of conflicts of interest.

At the same time, some former PayPal employees were publicly saying they agreed with Icahn's call to separate the payments business from the marketplace. Those included Tesla Motors Inc. founder Elon Musk, who also co-founded PayPal, and former PayPal chief operating officer David Sacks, who now works at Microsoft Corp. Donahoe said he had dinner with each of the men to give his side of the issue.

"They now have a better understanding of what we're doing," he said.

Musk wrote in an e-mailed statement about Donahoe and Icahn that he was "glad they were able to work something out.''

Leslie Hui, a spokeswoman at Microsoft, declined to comment.

During some of the most intense backbiting between eBay and Icahn, the CEO said he was able to get away from the bickering with a trip to Mexico with his wife.

After returning, Donahoe considered the advice he had gotten from Apple's Cook to reach out to the activist. Then he did just that and asked to meet Icahn. A month ago, Donahoe went to what he called Icahn's "beautiful apartment" with "good food."

"I said I've been meeting with all our large shareholders and I want to meet with you," Donahoe said. "I want to hear what you think, and I want you to hear what I think."

On March 19, after the dinner had taken place, Icahn backed away from his proposal to spin off PayPal. Instead, the investor proposed an initial public offering for 20 percent of the payments business.

The conversations between the two men were jump-started again last week by Lee, who got involved on April 3 when he met Icahn at his Fifth Avenue office over other matters. That afternoon, Donahoe said he was at eBay's headquarters when he got a phone call on his white iPhone from Lee about chatting with Icahn again.

Donahoe said Lee is "gifted" and was able to spark more discussions because the banker was a neutral third party who wasn't retained by either Icahn or eBay. Icahn said "it's a shame" Goldman Sachs Group Inc., which is a main banker for eBay, didn't reach out to him.

Lee didn't return calls seeking comment. Michael DuVally, a spokesman for Goldman Sachs, declined to comment.

On April 4, Donahoe and Icahn began talking more extensively. Lee suggested putting a third party member on eBay's board, Icahn said. Over the next two days, Icahn and Donahoe both came up with the idea of CVS Caremark Corp. Chairman David Dorman to be the new independent director, said Donahoe. Dorman had helped drive shareholder value at Motorola Solutions, another company that Icahn had targeted.

The talks culminated in a unanimous vote by eBay's board earlier this week over the agreement.

"We probably talked on the phone five, six, seven, eight times," Donahoe said of Icahn. "Ultimately, Carl's a great investor. He sees opportunity."

The CEO said he looks forward to getting the issue behind him and is continuing to look at opportunities for PayPal and the core markets business. He recently held a meeting with about 25 senior vice presidents to see how mobile and credit tools could be better shared among the two businesses, he said.

Icahn, who signed a confidentiality agreement with eBay, said he plans to stick with his investment in the e-commerce company.

"I think the company has got great potential," he said. "If you look back at my history, I reach a lot of settlements and make a lot of money."

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry