Go big or go home, says the logic behind much deal-making on Wall Street.
When it comes to technology mergers, providing a continuum of services and hardware and software in bundled form is a strategy that can add momentum to revenues and profits. So it is in payments as two financial technology heavyweights are pairing in the largest deal in that sector to date.
As reported Wednesday (Jan. 16), Fiserv said it would buy First Data Corp. for $22 billion in an all-stock deal slated to close in the second half of the year.
The consolidated company will be known as Fiserv.
Beyond the mechanics of the deal, and ownership structure — where for example, First Data holders get 0.30 0f Fiserv shares, Fiserv holders will own 57.5 percent of the combined entity and First Data holders the rest — the overarching strategy is to meld financial services and eCommerce.
Post-merger, as detailed by management, the two companies would cross-sell along one continuum, to create what the respective leaders of Fiserv and First Data said on a Wednesday post-announcement call would be a “one-stop shop” for integrated offerings to banks, merchants and a range of service providers.
In this case, First Data brings the services, the merchant focus, the POS technology (notably Clover, and more on this in a bit), and Fiserv the processing expertise spanning credit and debit card transactions. The deal comes, of course, as the competitive landscape is shifting for these two relatively traditional players eyeing smaller FinTech upstarts such as Square.
As was pointed out by Fiserv CEO Jeffery Yabuki (who will be CEO of the merged firm) and First Data CEO Frank Bisignano (to be president and chief operating officer of the merged firm), money movement is changing for the banks and credit unions that make up the typical Fiserv customer, and for the retailers and merchants that are among First Data’s key end users (and where First Data has partnered with banks to offer merchant services).
A Story Unrecognized?
As to why the timing is right for First Data to sell — and for Fiserv to buy — Yabuki noted on the call that there has been a seeming disconnect between the fundamental growth captured by First Data and the enthusiasm of its client base (where Bisignano has said in the past the company has been processing $70 billion annualized on Clover) and the way Wall Street had perceived the company was executing.
As Yabuki said, “We think the majority of the industry participants … did not understand all that Frank and this team have done” and that the stock valuation was not “well deserved.” By way of example, as estimated by PYMNTS even with First Data’s shares popping more than 21 percent in the wake of the buyout, the stock still traded at the end of the day for 11 times trailing 12-month earnings. The stock most recently peaked in the mid-$20 range through the summer months of 2018 before reaching around $17 and change, off around 32 percent through the most recent market rout.
(Side note: As noted by The Wall Street Journal, the deal announced Wednesday, upon closing, would bring KKR, which owns nearly 40 percent of First Data, “closer to exiting” an investment held for more than a decade.)
The investment community, said Yabuki, had been focused on First Data as offering “big box technology … but in fact they have technologies like Clover that is the fastest growing merchant platform in the U.S.” and where smaller and mid-sized businesses are able to “not just collect payments but run their businesses.” He also said that First Data proves attractive through technologies that serve ISVs in the cloud.
The digitization of payments — and the Fiserv-First Data news — comes amid consolidation where, for example, in 2017 Vantiv struck a deal for Worldpay for a bit more than $10 billion.
Strategies and Synergies
Yabuki stated on the call that the $500 million targeted for tech investments over five years following consummation will be funded out of $900 million in cost synergies and reductions to be realized over the same period. And where there are cost reductions, more financial firepower — aka free cash flow — can be used to pay down the sizable First Data debt load (at north of $17 billion) being taken on.
The two CEOs said on the call that the deal brings two complementary businesses together and ties together parts of the payments ecosystem.
In materials published by Fiserv and which accompanied the Wednesday conference call, the company said that there exists business model alignment with card-based payments and security solutions contributing 42 percent of EBITDA (which PYMNTS notes as a rough measure of free cash flow used by Wall Street) and global merchant acquiring as 58 percent of EBITDA. Fiserv has said that it has processed more than 30 billion digital payment transactions, and is tied to more than 25 million active bill payment users. First Data has more than one billion card accounts on file globally, and processes more than four out of 10 transactions done at the point of sale in the U.S.
“Let me give you two really good reasons why this transaction is compelling from my point of view,” Bisignano said on the call. “First, for years we had aspirations to develop a great core processing capability and a world-class digital banking platform. We will now have those products and with them a long list of core processing and digital FI clients.”
First Data, he continued, will be able to provide to those clients a revenue generating, merchant acquiring solution tied, too, to the Clover platform — and now in a fully integrated way that he said, later in the call, embraces the cloud. The second reason is tied to deleveraging the balance sheet.
“Upon closing we will expand into the merchant business,” said Yabuki, “which has financial characteristics similar to the rest of Fiserv and with high level of recurring revenues and attractive margins.” At the same time, management said on the call, overlap of customers between the two firms remains low — and revenue synergies stand at $500 million, though the pool is likely larger, said Yabuki. The combined revenues of First Data and Fiserv come in at $14.6 billion. Revenue synergies tied to the distribution of merchant bank acquiring services will come in at $200 million, and another $250 million to come from expanded payments offerings and network innovations.
During the question and answer session with analysts, Yabuki noted that the cost synergies targeted by the company are not tied to any platform combinations or consolidations between the two firms but are based on eliminating the duplicative structures “that you see when two larger companies come together.” Breaking down the cost savings, the firms said $350 million can be saved through tech infrastructure, and $200 million from operational synergies.
The “industrial logic” pointed out by the two executives ties in to the integration of products and services, and where for example, Clover can be used to tap into cash management services with banks, get real-time notification and can be digitally enabled at the point of sale into a bank’s website. “There are some really interesting opportunities,” said Yabuki of offerings such as bill pay, card issuance and merchant acquiring — “and it is not about different types of form factors or card payment brands or the point of sale. It’s about the movement of money the way consumers want it to be moved.”
Post merger, said the companies, payments will represent 45 percent of capabilities, with merchant acquiring another 38 percent, and financial services the remaining 17 percent.
“This is about making a very clear statement to the client community and the market that this is not about overlap in services,” Yabuki said on the call. “There are any number of high quality integrations that can be done that can deliver value to customers, the financial institution clients, to the users of merchant technologies and that can create unique, digitally-based transformative experiences that no one else is able to do today.”