The IPO Edition: Square, First Data And Worldpay

As the good people at Morton Salt first said in 1911, “when it rains, it pours.” And last week that rain came in the form of IPOs, with big updates from Square, big news for the widely coveted Worldpay and something of a big letdown for First Data.

If you feel like it all went by in a blur, don’t worry, you aren’t alone. There were 4 million stories written about Square’s IPO alone last week — and we mean that almost literally (a Google search of “Square IPO” pulls up 3.8 million news articles on the subject). If you’d like the need-to-know narrative for all three of them, lucky for you, it’s Monday, and we have you covered with the Data Dive.

Square – The Wait Is Over

Square managed to capture all the headlines with its mid-week announcement that it will finally be IPOing. This follows years of speculation about what the ultimate fate of the startup that inspired what feels like a near infinitude of mobile point of sale players, all bent on bringing the small merchant into the card (and mobile) payment accepting future.  

Based on Square’s S-1 Filing with the SEC, which is preliminary (meaning many details may change or be filled in later), the firm plans to offer $275 million stock on an as-yet undisclosed stock price (the $275 million figure is also apt to change). It will trade on the NYSE as SQ, CEO Jack Dorsey holds 24.4 percent of the firm and Khosla Ventures is the second largest shareholder with 17.3 percent.    

The filing also gave some insight into Square’s (pretty lousy) deal with Starbucks. All in, Square lost $71 million from processing Starbucks’ payments in three years. The loss of Starbucks, however, has made some industry watchers a bit nervous, as the coffee chain also accounted for 11 percent of Square’s total sales this year and the rather public dissolution of the partnership did little to instill confidence. Others applauded the move as a sign that it was finally getting rid of a massive anchor of losses around its neck.

Also hanging over the firm (and causing some stir) is the dual role to be played by Square CEO Jack Dorsey. Dorsey was also recently named CEO of Twitter, a move that did not exactly elicit cheers from all circles.

“Management and management focus are the single most determining factor of the success, or lack thereof, of a company pursuing an IPO,” Lise Buyer, an IPO consultant with Class V Group in Silicon Valley, told Reuters. “Were I a [Square] investor, I would want to be compensated for the cost of a part-time CEO who already had a full plate. And by compensated I mean I would expect a lower valuation.”

Others noted that 38-year old Dorsey, who is well-known for his high energy approach, may be able to pull the demands of two CEO-ships for a while — but that it likely cannot be a permanent solution for either firm.

“Only someone who’s 30-something could pull this off,” noted Todd Antonelli, managing director of the Berkeley Research Group in Chicago.

And others, taking a somewhat different view of the role of the CEO, thought that perhaps concerns are somewhat overinflated.

“A role of many CEOs is to serve as broad strategic planners, as suppliers of vision,” said Paulo Prochno, a clinical professor of management at the Smith School. “That’s not necessarily time-intensive: It’s based more on your experience in the industry and your insights. You don’t have to work 50 hours a week to have a good insight into where your industry is headed.”

No, you probably have to work 80. It is nuts to think that Dorsey can be the CEO of two publicly traded companies in dynamic markets like payments and commerce and whatever one wants to call Twitter these days.

Which leads to the final question tickling the minds of investors going into Square’s IPO : Does its CEO really have good insight into where the payments industry is headed?  

“It’s amazing how many innovators underestimate the complexity of payments because it looks so easy on the surface. So it isn’t all that surprising that a creative and high energy innovator who didn’t know payments but thought he could build a better mousetrap and solve a small merchant problem related to card acceptance, would think that mashing all of those merchants into a network that consumers would then be motivated to download a mobile app and use at those merchant locations would be sensible and even easy to accomplish,” MPD CEO Karen Webster wrote in a recent commentary on Square.

“But that’s the hardest problem in payments — maybe even in all of business — to solve.”

Though Square and CEO Jack Dorsey have worked hard to brand Square as “more than a payments processing business” the entirety of Square’s core business is in payments processing. They are a merchant acquirer. There are two things important to note with respect to that: merchant acquiring is a commodity business, won and lost on price — and there are lot of strong(er) competitors who have a lot of other bells and whistles to wrap around payments processing that also make the numbers much more inspiring.

And by the numbers (as seen in the S-1), Square’s figures in that business are promising, but not inspiring. Which is why it has focused so much on its merchant lending business – again, putting it up against competitors like PayPal, CAN Capital, OnDeck and the dozens of others who are well-established in this space.

Revenues clock in below most expectations at only $850 million in its latest full year. The good news there is that sales grew by more than 53 percent over 2013. Taking the six-month tally thus far in 2015, at $561 million and extrapolating it through the back-end, the revenue run rate comes in at a little over $1 billion.

Square’s valuation is $6 billion (admittedly before the end of 2014’s full term) and which is a 6x sales multiple on 2015 (projected), and more than 7x on 2014 (actual). That is a rather stark contrast, especially for a firm coming into the IPO market when investors’ love of  small tech firms hasn’t been particularly robust. This has resulted in many firms steering clear of the public market for now, opting instead for private funding rounds to give them a boost in a crowded market.

A number of investors paid a little less than $15.50 a share through the Series E, and mandates hold that IPO price at $18.56 a share, or higher – or else they receive additional common shares, which would presumably dilute other holders, all things being equal – and no one wants to get diluted.  

Simply stated: There’s a floor under the stock.

But for a firm as widely lauded and beloved as Square, a floor may not do it when many are expecting it to go crashing through the ceiling. And until the shares hit the market, there is no way of knowing what investors will do.

And given the other payments processing IPOs this week, it will even be kind of hard to guess.

Worldpay – The IPO Bang…

Those looking for signs of encouragement for the public market for payments could have taken a peek across the pond last week, where Worldpay floated the largest IPO on the London Stock Exchange this year so far.

On its first day of institutional trading, the firm soared past its initial £4.8 billion ($7.3 billion) market cap on £2.40 a share ($3.66), jumping by 10 percent in trading among institutional investors.

“Today’s announcement is a significant milestone for Worldpay,” said Chief Executive Philip Jansen, according to The Telegraph. “We are proud to be a leader in global payments with a clear strategy for continued growth as a listed company.”

“We have already invested over £1 billion in our technology, people and capabilities, helping us to become an advanced and sophisticated technology-led organization with great potential.”

Worldpay handles ~40 percent of European Web transactions and processes around £370 billion ($564 billion) in payments each year, from about 400,000 merchants. The firm brought in a profit of £765 million ($1.2 billion) on revenues of £3.6 billion ($5.5 billion). In the first half of 2015, sales were up 13 percent.

On its road to IPO it found itself at the center for a fairly fraught bidding war between Wirecard, Blackstone, Hellman & Friedman, Ingenico and JPMorgan’s private equity arm. Had that acquisition gone through, Worldpay would likely have been bought up for around $9 billion.

The Worldpay IPO also reverses a slumping trend on the London exchanges this year. Before Worldpay, 2015 has seen 93 listings this year, raising £5.3 billion (~8 billion). That represents about half of what was brought in by 2013’s 136 IPOs.

However, as good as the news was in London for WorldPay, it was just about as bad in New York for the week’s other big processor IPO.

First Data … The IPO Whimper  

In a word, oof.

The First Data IPO, which some had initially forecast would leave the company with a valuation of $40 billion, has come and gone and left First Data with a valuation far, far south of $40 billion.  

In the aftermath of the IPO, First Data is valued at $14 billion, which we should note is enough to cement the debut as the largest listing in the United States thus far in 2015 (a year nearly over). However, the IPO didn’t perform as originally expected – with suggested shares going for $18 to $20 a pop.

Instead, shares declined 2 percent on the initial day of trading, dipping below its $16 initial price, and ending the day at $15.75.

The IPO brought in a total of $2.6 billion for First Data, which is not unimpressive but not enough to make a big dent in its heavy debt load of $21 billion. Private equity firm KKR paid $30 billion for First Data when they first took the firm private in 2007.  

First Data processes trillions of dollars in debit and credit transactions per year. And while the IPO did not perform as expected, a First Data senior executive is far from despondent and told Karen Webster last week that now that the public offering is the rearview mirror, the best is very much yet to come.

PYMNTS will have that interview tomorrow. Until then, the moral of this week’s story is that payments IPOs are fun to watch and anything but predictable.   


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