Banking & Finance

What Visa Really Gets With CyberSource (V, CYBS, EBAY, AXP, MA, DFS, GPN, TSS, PAY)

Jon C. Ogg

There is an interesting merger this morning in the credit card processing industry. Visa Inc. (NYSE: V) is acquiring CyberSource Corporation (NASDAQ: CYBS) for $26 per share in a deal valued at almost $2 billion.  While not a cheap with a price tag of 6-times revenues, it is important to see why Visa is making this deal and what it will get out of it with the CyberSource and Authorize.net brands.  Visa is buying a firm that helps in payment processing, payment security, and fraud management…. one that also gives it a sliver of business that is going to Visa’s competitors.

The Authorize.net solution does also accept MasterCard, American Express, Discover, Diners, and even eChecks.  CyberSource also deals with PayPal and BillMeLater.  So while the company may be referring credit card and transaction processing for outside transaction processors like eBay Inc. (NASDAQ: EBAY) for PayPal and BillMeLater, American Express Company (NYSE: AXP), Mastercard Incorporated (NYSE: MA), and Discover Financial Services (NYSE: DFS), it will now start getting a tiny cut of that business as long as it goes through that merchant network under the brands and services being bought.

CyberSource says it plays a role in processing about 25% of all the “ecommerce dollars transacted in the United States” and it is a safe bet that Visa will be getting a small cut from business that would have gone away otherwise.  The company serves almost 300,000 merchants through its CyberSource and Authorize.Net brands.

What Visa will get is cutting out one step in using Visa debit, prepaid and credit products for purchases made online.  CyberSource is predominantly in the U.S., so Visa can accelerate that business model globally.  Visa will get to integrate one more layer of fraud detection, something that ALL banks and credit card processors need to be far better about.  Visa will also be gaining an operation in secure payment data hosting solutions.

The deal is not expected to be accretive to earnings on the surface.  It is listed as being dilutive in 2010 and also slightly dilutive in 2011.  That is because CyberSource is a high-beta name with high multiples against earnings and revenues.  What is not said is that this is a double-dip for Visa, and that allows it to get a small piece of the pie as a gatekeeper that would otherwise be going elsewhere.  The price is going to be up for debate, but this is a smart acquisition.

CyberSource shares are up almost 32% at $25.62 and this represents highs not seen in a decade.  The notion that this was a $50, $60, and $70 stock in 1999 won’t have much importance today.

We do not want to draw too much cause and effect here for secondary or tertiary mergers which could come from this consolidation.  The other companies which could come into focus at least from this deal are Global Payments Inc. (NYSE: GPN) with a $3.7 billion market cap and Total System Services, Inc. (NYSE: TSS) with a $3.25 billion market cap.  In a stretch, one could even argue that companies similar to VeriFone Holdings, Inc. (NYSE: PAY) for at-site merchant locations, but again we do not want to try to look for too much cause and effect here.

Visa shares are hardly down on the deal with a drop of 0.25% at $93.84, its market cap is around $70 billion.  With close to $6 billion in cash and longer-term securities on hand, this deal is still very affordable for Visa.

JON C. OGG