EBay Inc. will buy VeriSign's payment processing business for $370 million and merge it with its PayPal unit as part of a wider e-commerce payment services and security alliance, the companies said on Monday.
The move was seen as letting PayPal, already the largest online payments company, expand faster beyond its core audience of eBay-based transactions and to compete better with credit cards as an online-payment system, analysts said.
VeriSign's payment gateway software connects Web businesses with payment processors generally run by major banks. VeriSign also is the dominant supplier of software used to manage secure credit card transactions between consumers and Web sites.
PayPal said the payment gateway business would generate an incremental $100 million of revenue for it in 2006.
VeriSign Inc. shares rose 5.2 percent to $21.08 in after-hours trade following the announcement of the deal.
Shares of eBay were unchanged, after closing up 56 cents, or 1.4 percent, to $40.46 in Nasdaq trading ahead of the news.
As part of the deal, eBay will buy up to one million tokens from VeriSign that display constantly-changing numbers used as passwords to increase security. So-called 'two-factor authentication' relies on a set password and a number from the token, which is synchronized with a central server.
Rival RSA Security Inc. pioneered the market for such digital security tokens, but VeriSign has been expanding, and the tokens are being embedded in computers, mobile phones or offered as key chain accessories.
"We are working furiously to make customers as safe as they can be and to give them the tools to make their transactions as secure as possible," Jeff Jordan, PayPal's president, said in a phone interview.
Legg Mason analyst Scott Devitt said the deal promises to give PayPal a leg-up in becoming the accepted payment mechanism system on VeriSign's 100,000 or so small business sites.
"Strategically the deal absolutely makes sense," and was at a favorable price, relative to revenue acquired, for eBay.
VeriSign's payment software system -- which handled more than $40 billion in payments during 2004 -- will help PayPal expand its push into the merchant services market, analysts said.
Two-thirds of PayPal's $6.5 billion in payment transactions were done on eBay during the second quarter. EBay wants to expand the remaining third, called merchant services.
"Given the early stage revolt among retailers against rising credit card processing fees, particularly among online retailers, we believe PayPal is well positioned to take share in this market," CSFB analyst Heath Terry said in a note to investors.
Some 22 percent of U.S. e-commerce transactions passed through the VeriSign software gateway in 2004, eBay spokeswoman Amanda Pires said. PayPal payments accounted for 9 percent of e-commerce payment service volumes, she said.
The gateway competes with software from CyberSource Corp. and Authorize.net, a Lightbridge Inc. unit.
At the agreed price, the deal with Verisign is unlikely to stir up concerns like those that followed Ebay's previously announced agreement to acquire Web communications company Skype Technologies for up to $4.1 billion, Devitt said.
Some investors questioned whether Skype's revenue and profit outlook were strong enough to justify the price, and why auctioneer eBay should get into Web telephony.
The VeriSign gateway business should generate a 20 percent operating margin, based on a pro-forma calculation that assumes the two companies had been merged for a full year, the companies said. More financial details will be provided when the deal closes, which executives said they expected to occur this quarter.