April 21, 2010 / 12:42 PM / 10 years ago

Visa seeks online growth with CyberSource

NEW YORK (Reuters) - Visa Inc said on Wednesday that it would buy CyberSource Corp, a company that helps retailers accept online payments, to boost its business in emerging markets and online commerce.

Visa, the world’s largest credit and debit card processor, would pay $26 a share, or about $2 billion, for CyberSource. That amounts to a premium of nearly 34 percent over CyberSource’s closing share price on Tuesday.

“It’s a pretty significant premium ... but if you look at the long-term value and the potential contribution to Visa down the road, certainly you can justify it as a multi-year payout,” said Michael Nix, a portfolio manager at Greenwood Capital Associates, which includes Visa shares in its $800 million worth of assets under management.

Visa’s shares closed down 0.98 percent at $93.13, while CyberSource’s surged 32.3 percent to close at $25.72. CyberSource was the second-most active stock on Nasdaq on Wednesday.

Visa said the deal would increase its ability to process payments online, where analysts estimate that it already controls about 45 percent of the market. CyberSource’s technology also makes it easier for retailers to accept new types of payments, including those made with mobile phones.

“It ensures that they’re going to continue to be very competitive in important growth parts of the market, whether it’s online payments, mobile payments or international payments,” said Richard Shane, an analyst at Jefferies & Co.

CyberSource has an 11-year partnership with Visa. With partners and on its own, CyberSource processes about 25 percent of U.S. online commerce transactions. Its 295,000 merchant clients include British Airways Plc, Home Depot Inc, Facebook and Google Inc.

Visa is increasingly dependent on new technologies and emerging markets for growth, now that most U.S. consumers use traditional credit or debit cards.

Though Visa relies on the United States for 59 percent of its revenue, international sources should account for more than half by 2015, executives told investors last month.

CALLING FOR GROWTH

Mobile phone payments could be especially profitable for Visa in emerging markets, where the infrastructure for credit card payments is less developed, but cell phones are increasingly widespread.

“CyberSource’s key market opportunities are international, specifically Asia and Latin America,” Visa Chairman and Chief Executive Joseph Saunders said on a conference call.

“This will be a significant focus, effective immediately.”

Visa and rival MasterCard Inc are fighting for market share in online payments as more consumers shop on the Internet, often using competitors such as eBay Inc’s PayPal unit.

Last week Ajay Banga, who will become MasterCard’s next CEO in July, also identified emerging markets and e-commerce as priorities for the company. [ID:nN12177969]. MasterCard said it has created a new global research and development arm to work on such innovation.

Other competitors have been investing in these areas as well, so Visa’s deal does not necessarily give it a big advantage, said Scott Valentin of FBR Capital Markets.

“But it definitely leapfrogs Visa in terms of where they were to where they are now,” Valentin said.

The deal is Visa’s first acquisition since going public in March 2008. It is expected to close by September 30, and would reduce Visa’s earnings for that quarter by about 4 to 5 cents a share.

Visa is paying 25 times CyberSource’s estimated earnings per share in 2011, according to Valentin, who called the price “a fair multiple” given CyberSource’s market share. Other analysts and investors generally agreed, saying that most payment processors are valued at around 20 times their price-to-earnings ratio.

“If you look at (CyberSource’s) footprint and the relationships they have with a lot of the larger e-marketplace and social network sites, you can’t argue that they are a leading name in that space,” Nix said.

PLENTY OF CASH

CyberSource processes some transactions directly, but the majority of its business is providing security and fraud-management services to merchants. Visa said during the call that it would shift CyberSource away from the processing business, and refer the affected merchants to financial institutions that work with Visa.

JPMorgan Chase & Co advised Visa on the deal, while Goldman Sachs Group Inc advised CyberSource.

Saunders said during the call that Visa’s “excess cash position remains strong even with this transaction.” The San Francisco company had $4.1 billion of cash and cash equivalents as of December 31.

CyberSource President and CEO Michael Walsh is expected to remain with Visa and oversee his company’s operations after the deal closes. Chairman William S. McKiernan, who founded the company in 1994, will become an executive advisor to Visa during CyberSource’s integration.

Reporting by Maria Aspan; Editing by Maureen Bavdek, Gerald E. McCormick, Richard Chang and Robert MacMillan

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