Visa Inc. agreed to pay $2 billion for CyberSource yesterday, which amounts to a price/earnings ratio of about 32.
The average price/earnings premium for mergers and acquisitions from February 2009 to February 2010 was 20.9, according to FactSet.com.
But paying the premium was necessary to solidify the credit card giant’s position in e-commerce and mobile commerce, two fast-growing retail channels, say experts.
CyberSource plays a role in processing nearly 25% of all e-commerce dollars transacted in the United States, says Visa. The company serves more than 295,000 merchants, including The Home Depot, Google and British Airways, through its CyberSource fraud-prevention services and its Authorize.Net payments gateway, which funnels online transactions to payment networks.
“If you look at the payments ecosystem up until now, it has been formed around payments for certain use cases, such as at a store or online with a computer,” says Dave Sikora, CEO of m-commerce technology provider Digby. “But I think what is happening is all the players in the payments ecosystem see a tsunami in the future that is mobile. Particularly as mobile has integration with a consumer’s wallet and handheld device. What companies like Visa are doing is looking to solidify their position in the current ecosystem in order to ride this wave.”
By expanding its online payment, fraud and security management capabilities, Visa will be in a better position to provide security and convenience to merchants and consumers in the e-commerce world, which, in turn, will better position it the m-commerce world, he says.
Bernardine Wu, CEO of consultants FitForCommerce, says the premium Visa paid for CyberSource was a worthwhile gamble considering the state of the current market. “With fraud prevention and cross-border payments being top of mind for online retailers, CyberSource can only increase in value,” she says.
She also sees the acquisition increasing Visa’s market share. “To Visa, this is the online version of owning the most popular point-of-sale system for retail stores. This potentially helps shift ‘share of online wallet’ to Visa products.”
At the same time, Visa says it will use its massive international network to spread CyberSource’s technology outside of the North America.
Since CyberSource’s international business only represented 8% of its total revenue in its 2009 fiscal year, it offers Visa a significant opportunity to quickly grow the business, says Steve Mott, a payments consultant with BetterBuyDesign.
“CyberSource was at the point where it needed a big partner to go to the global stage,” he says. “CyberSource has been looking for years for that partner. Ideally or logically it would have been a processor like First Data, but it’s clear Visa can do the same thing. And it brings Visa exactly into the sweet spot where they can increase their value added and put them way ahead of the pack of payment service providers and gateway-type companies.”
However, not everyone is convinced it made sense for Visa to pay such a high premium.
“It’s difficult to justify economically given their current business,” says Andrew Jeffrey, SunTrust Robinson Humphrey analyst. “So what Visa needs to do, and intends to do, is two things—use CyberSource as a means to expand e-commerce as a category, and open up new international markets for e-retailers that don’t sell international due to cross-border fraud risks. For Visa, it is a relatively small deal, so there’s relatively small downside. But I think there are other acquisitions that the company could have made that would have been better.”