Visa Grabs CyberSource for $2 Billion

Credit and debit card giant Visa (V) expects to generate cash flows of $2 billion (there is roughly $6 billion in the bank already) in 2010. That is certainly enough to cover capital investments of $200 million and periodic share buybacks -- of course, Visa also has the option of buying other companies. And this week, Visa (V) agreed to a $2 billion deal for CyberSource (CYBS), a leading provider of electronic payment services for e-commerce businesses.

The transaction comes to $26 per share, a 34% premium to CyberSource's Tuesday's closing price. Actually, this is the company's highest stock price in 10 years, when the Internet bubble was in full force.

Tthe CyberSource deal is important for Visa as the company needs to beef-up its digital business and also find ways to deal with fraud protection.

An E-Commerce Pioneer

In 1994, William McKiernan founded CyberSource, which was the first e-commerce payment management company. In fact, he even came up with the idea for the "buy" button.

McKiernan understood that it made sense for companies to outsource e-commerce capabilities. After all, the technology would only get more and more complicated -- and fraud would get worse and worse.

Much of CyberSource's development was in-house. But the company did pull off some acquisitions, including its purchase of Authorize.Net in 2007. The deal provided a key position in the growing small-business market.

Today CyberSource handles roughly a quarter of all U.S. commerce transactions and serves more than 295,000 merchants. Some of the customers include British Airways, Home Depot (HD), Google (GOOG) and Facebook. Last year CyberSource generated $265.1 million in revenue, up 16%, and processed 2.5 billion billable transactions. Earnings came to $11 million.

Next Steps

On the financial side, the CyberSource deal will result in fiscal fourth-quarter earnings dilution of four to five cents per share. But this is a reasonable price to pay for a foothold in a critically important industry. The Nilson Report estimates that electronic payments will represent roughly 63% of the $9 trillion in U.S. consumer transactions by 2013.

In fact, CyberSource will help increase the usage of Visa offerings, such as debit, prepaid and credit cards. What's more, the company can roll out e-commerce services across its massive global platform, which should allow for a continued top-line growth for the long haul.

And CyberSource is likely to help with mobile payment applications. As seen with the success of eBay's (EBAY) iPhone apps, this should be yet another lucrative market opportunity.

All in all, this is a smart deal for Visa. The main challenge will be integration, but the companies have been working together since 1999, so this should not be too difficult.