CyberSource to Take Over CardSystems - ' Is CyberSource Really Getting ' (
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a Deal?">
Another financial analyst that tracks CyberSource—Franco Turrinelli at William Blair & Co.—said there are too many unknowns to determine if the price would be heavily discounted.
CyberSource CEO Bill McKiernan's team "are pretty smart people. I don't think Bill and his team are going to overpay."
Gillis also questioned whether the discounting here would be that substantial.
The $18 billion in processing volume probably amounts to only about 10 cents or 11 cents per transaction, which Gillis estimates would give the privately held CardSystems about $17 million to $20 million in annual revenue.
"So I would expect, at the end of the day, to see this going for between $20 million and $30 million," he said. "It's an interesting transaction but it's a lot smaller than people think."
But for CyberSource—which Gillis projects will have about $50 million in annual revenue this year, growing to about $63 million next year—that's not a trivial purchase.
Financial analyst Turrinelli said he sees this deal as a very preliminary work in progress.
"My initial reaction is that it's a non-binding letter of intent," Turrinelli said. "There are clearly still a lot of negotiations left."
The big question hanging over the deal is whether Visa and/or American Express will reverse themselves and welcome what had been the CardSystems team back into its operations.
"If Visa or American Express do not flip, it will be a very different deal," Turrinelli said, adding that the technology assets wouldn't change either way.
The CardSystems data theft case itself raises questions about how well the industry patrols itself. To read more, click here.
For CyberSource, the asset acquisition has some nice side benefits, such as improving its small business channel and the ability to take processing business away from a direct competitor—Authorize.net—which had been working with CardSystems on E-Commerce transactions.
About 20 percent of CardSystems revenue is in E-Commerce, Gillis said.
"They'll immediately be able to boot those (Authorize.net) guys out and take that business," Gillis said.
But this deal isn't final, and the big wildcard is how the credit card companies will react.
If American Express and Visa—and, for that matter, MasterCard—do not agree to resume business because of the change in management, the deal could die, Gillis said.
The CyberSource statement also stressed that the deal is far from final. "The transaction is subject to further due diligence, execution of a purchase agreement, satisfaction of closing conditions and may also be subject to governmental or other regulatory approvals," it said.
"The transaction is expected to close in the fourth quarter of 2005. The letter of intent provides for an exclusivity period during which CardSystems is not permitted to engage any other entity regarding the sale of its business."
Many of the issues surrounding CardSystems are more perception than strict security. Given that the company violated key provisions of contracts and has announced no punitive measures such as resignations or firings, some have criticized CardSystems senior management
for not having taken sufficient responsibility.
Typically, in this kind of a purchase, the acquiring company provides assurances to customers that key management players and the company's brand would be preserved. In this instance, though, Gillis said, the opposite is more likely.
Did CardSystems adopt a Blame The Auditor defense to Congress? What level of responsibility is appropriate? To read more, click here.
"I would expect the management team at CardSystems will not be needed," Gillis said. "You can show that what CardSystems did won't be tolerated by the industry and that these people will be unemployed."
CyberSource's Frymire wouldn't say whether any members of top management would be offered jobs. "We do expect to extend (jobs) to most of the current CardSystems employees," he said, adding that he couldn't discuss individual personnel.
As for the overall reputation of the company whose assets are being acquired, Frymire said that he hoped the good brand attributes of CyberSource would overcome the negatives from CardSystems.
"My belief at this moment is that we would not keep the (CardSystems) name," he said.
Frymire described CardSystems as "a solid company that experienced an unfortunate breach. We do hope that CyberSource's strong reputation hopefully prevails and that the reputation of CyberSource will have the mindshare of customers and observers rather than the reputation of the CardSystems incident. Over time, CyberSource's reputation for security and integrity will win out."
IHL's Buzek said the technology assets of CardSystems—coupled with its extensive infrastructure—is not trivial.
"They have some excellent technology. With a new home and heavier security from CyberSource, the service should be much stronger," Buzek said.
Retail Center Editor Evan Schuman can be reached at Evan_Schuman@ziffdavis.com.
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