Making a deep push into merchant payment services, eBay's (NASDAQ:EBAY) fast-growing PayPal subsidiary will acquire VeriSign's (NASDAQ:VRSN) payment gateway business in a $370 million transaction.
Even though many still associate PayPal as a way to wrap up eBay auctions, the online payment service has been growing much faster than eBay has domestically as of late. It is now becoming the online platform of choice worldwide, and the VeriSign acquisition will certainly help PayPal's already gangly arms span out ever further in an e-commerce embrace.
VeriSign's gateway business facilitated $40 billion in transactions last year. eBay expects the deal to generate $20 million in pro forma operating profits and $100 million in revenue next year after synergies are realized.
So is the deal accretive or dilutive? eBay trades at 14 times trailing revenue and 43 times operating profits. Scooping up the incremental business at just 3.7 times next year's revenue and 18.5 times its operating income would be considered accretive to earnings. That's a good thing. However, with an implied 20% in operating margins, VeriSign's operation isn't quite as lean as eBay's. The leading online auctioneer posted operating margins of 35% this past quarter.
Then again, deals aren't necessarily about the immediate financial payback. On paper, eBay is overpaying for Skype. But in reality, it may prove to be a huge bargain if the company is able to seamlessly integrate the online communications service into its suite of offerings.
If anything, my only concern here is that the company may be on an acquisitive tear. Even if a company is able to string together a dozen attractive deals, they're a dozen deals too many if the company loses focus or blurs its identity along the way. In the online space, multiple acquisitions have been completed by companies such as News Corp. (NYSE:NWS), CNET Networks (NASDAQ:CNET), and Google (NASDAQ:GOOG). Time Warner's (NYSE:TWX) America Online division has announced three new purchases since August!
A REIT can gobble up standalone properties without fail. Traditional companies need to make sure that every deal fits into its long-term picture. So what does this photograph of VeriSign and eBay show you? It shows you that eBay is hungry. It also shows eBay tossing VeriSign a bone in a deal for user verification security services that will pad VeriSign's coffers.
In short, both companies are smiling. More often than not, that's the best type of deal.
Time Warner and eBay are active Motley Fool Stock Advisor recommendations. CNET was singled out this summer for members of the Rule Breakers newsletter service.
Longtime Fool contributor Rick Munarriz is a satisfied eBay user -- with the 150 positive feedback recs to show for it. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
