PayPal Will Pay $370 Million to Buy VeriSign’s Payments Gateway

PayPal Inc. will acquire the online payments gateway business of Verisign Inc. for $370 million under an agreement reached today by VeriSign and eBay Inc., Paypal's parent company. The deal, which is expected to close before year's end, also includes a multi-year agreement under which eBay will invest in VeriSign security technology, with eBay agreeing to buy up to 1 million two-factor authentication tokens from VeriSign for deployment by eBay and PayPal in 2006. In the hands of San Jose, Calif.-based PayPal, the VeriSign payment gateway, which processed in excess of $40 billion in volume last year for Internet businesses, will provide a key channel into the off-eBay community of online merchants that PayPal has been pursuing for the past year. The gateway currently serves more than 100,000 mostly small merchants. “It accelerates our merchant-service business and gives us one of the premier gateway products,” says a PayPal spokeswoman. In June, the processor introduced Website Payments Pro, a product that offers small online businesses the ability to establish merchant accounts for card acceptance and streamlines the processing of PayPal payments. Now the company plans to add the VeriSign gateway to that product mix. “VeriSign's payment gateway is a popular and market-proven product that perfectly complements PayPal's existing payment services, ” said Jeff Jordan, PayPal's president, in a statement. The rollout by eBay and PayPal of two-factor authentication will represent one of the largest implementations of the security technology in the e-commerce business, according to VeriSign, Mountain View, Calif. The introduction of the technology will be accompanied by eBay marketing programs to encourage accountholders to adopt and use it. PayPal has 79 million accountholders, of whom 23 milllion are active, while eBay boasts 157 million registered users, of whom 65 million are active. Two-factor authentication requires a second factor known or held by consumers?such as a token?along with a PIN or password to initiate an online transaction. Tokens usually generate one-time passwords for each transaction. The PayPal-VeriSign deal comes just weeks after CyberSource Corp., a gateway competitor based in Mountain View, Calif., agreed to buy the assets of CardSystems Inc., an Atlanta-based credit and debit card processor for both card-present and Web-based merchants. A CyberSource spokesman calls the VeriSign deal “an interesting development” but says it will have no impact on his company's business. “PayPal can now broaden their merchant-services business,” he says. “It makes PayPal a competitor, but on the other hand it eliminates a competitor as well.” Given what it calls “synergies” with its existing merchant base, PayPal expects the VeriSign gateway to produce $100 million in incremental revenue next year, with a 20% pro forma operating margin. PayPal will pay the purchase price in either cash or eBay stock. According to the PayPal spokeswoman, talks leading to the acquisition began several months ago when the online processor began discussing with VeriSign an integration of the company's gateway, much as it has created links to gateways operated by CyberSource and Retail Decisions USA Inc.