Internet service provider PSINet's deal to buy a telecommunications company underscores the growing significance of transaction processing in emerging Web business strategies.
The Herndon, Va., company agreed last week to pay $720 million in cash and stock for Transaction Network Services Inc., a provider of telecommunications backbone services to many leading credit card and electronic banking systems. Its network carries 70% of U.S. credit card transactions and has been expanding globally.
PSINet, which provides Internet connection services primarily to businesses, is following such major Internet forces as Yahoo Inc., America Online Inc., and Microsoft Corp. in its desire to build and own electronic commerce capabilities and related operational expertise.
Even eBay Inc., the Internet auctioneer, is contributing to the trend. In May it agreed to buy Billpoint Inc. of Redwood City, Calif., in an effort to streamline processing of credit card payments.
PSINet is aiming to extend its e-commerce services to the merchant market, which Transaction Network Services, or TNS, serves with its connections to major electronic clearing systems.
Ulric Weil, an analyst at Friedman Billings Ramsey & Co., described the deal as an interesting convergence of a private financial network and an Internet-focused company.
"PSINet bought itself an attractive property," he said.
PSINet, which sells Web site design, maintenance, and payment processing capabilities to merchants, could use its Internet technology to deliver transactions at lower costs, the analyst added. "A brokerage firm or a financial services firm can avail itself not just of the transport that (Transaction Network) provides to get the transactions processed, but also avail themselves of PSINet's value-added services that already exist."
John J. McDonnell, president and chief executive officer of Transaction Network Services in Reston, Va., said PSINet courted his company because it is certified with every major transaction processor.
TNS operates as a wholesaler of services to the credit and debit card, health care, and electronic benefits transfer markets. Major customers include American Express Co., First Data Corp., and National Data Corp.
PSINet would take advantage of Transaction Network's processor certification when selling merchants its comprehensive range of commercial Internet services.
"We are another piece in their puzzle for totally simplifying the ability to transaction-enable Web sites," Mr. McDonnell said.
"If you get certified on our gateway, you do not have to go through the hassle of getting a software package certified with 50 processors," he added. "We will basically give you an easy path to do that."
Mr. McDonnell said the merger would also improve the telecommunications services that connect merchants and processors. Transaction Network can tap into PSINet's large Internet-based communications infrastructure.
Transaction Network would develop a virtual private network -- based on Internet protocols to ease connectivity and costs, but sealed off from the open Internet to assure security purposes. "It really won't be the Internet per se," Mr. McDonnell said. "We do not want our transactions mixed in with general Internet traffic."
John Backus, a partner with Draper Atlantic, a Reston-based venture capital affiliate of Draper Fisher Jurvetson, said Mr. McDonnell built his network from scratch in the last nine years, competing with AT&T Corp, Sprint Communications Co., and MCIWorldcom Inc. with telecommunications technology that was "better, faster, and cheaper."
"People thought he was crazy back then, going up against these giants, but they were wrong," said Mr. Backus, a former president and CEO of Intelidata Technologies Corp., an on-line banking systems vendor.
Transaction Network, which had $42.7 million in second-quarter revenue, would merge with a company that has $1.9 billion in cash. Mr. Weil said that pool of funds would help TNS accelerate its international expansion. PSINet, which had $123.8 million of revenue in the second quarter, raised $1.2 billion in debt financing in July.
TNS stock price rose 31% since the deal was announced last Monday, closing Friday at $44.9375. PSINet stock closed Friday at $50, up 10% for the week.
In a separate event, Mr. McDonnell last week personally invested $1 million in St. Louis-based PaylinX Corp., a developer of enterprise-wide Internet payments technology.
PaylinX, which is jointly developing an Internet gateway payment service with Transaction Network Services, has raised $25 million in the last three years. It has sold its technology to 130 merchant customers.
Mr. McDonnell said he recommended an investment to his own board of directors. Because the board was not interested in venture capitalism, "I took a position directly," he said. "It's called putting your money where your mouth is."
