By Harvey George and Jules Merringer (LSE & University of Michigan) - Date: 02/02/2019
Overview of the deal
Acquirer: Fiserv Inc. (NASDAQ: FISV)
Target: First Data Corporation (NYSE: FDC)
Estimated value: $22 billion
Announcement date: 16th January 2018
Acquirer Advisors: J.P. Morgan
Target Advisors: BAML
On January 16, 2019 Fiserv, the financial technology solutions provider, announced it will buy First Data, the world’s largest payment processor, in an all-stock acquisition valued at $22 billion, making it one of the largest acquisitions in the fintech sector. First Data investors will receive a fixed exchange ratio of .303 shares of Fiserv for every share of First Data common stock they currently own, valuing First Data at $22.74 per share as per closing on January 15th and representing a 29.6% premium for First Data shareholders. Once the deal closes in the latter half of 2019, the company projects its EPS to increase by more than 20%.
Though Fiserv mainly provides large financial institutions with payments software, by partnering with First Data, a fintech company that sells electronic payment processing hardware to all types of businesses (herein referred to as merchants), the combined company will be in a position to offer products to customers across the institutional spectrum, from banks to SMEs, seeking to adapt to the changing payments landscape. Fiserv will be able to offer First Data’s Clover Point-of-Sale (POS) capabilities to their financial services clients, while First Data can introduce Fiserv's biller solutions and cash management solutions to their corporate clients. The combined company also plans to invest $500 million over the next five years to develop technologies in the payments space, including better merchant services, advanced risk management, digital enablement and data focused solutions.
Pending shareholder and regulatory approval, Fiserv’s CEO Jeffery Yabuki will become chairman and CEO of the combined firm while First Data’s CEO Frank Bisignano will become president and COO of the combined firm.
“Through this transformative combination, we expect to redefine the manner in which people and institutions move money and information” -Jeffery Yabuki, Fiserv CEO
Company Details (Fiserv Inc.)
Fiserv is a financial-services technology provider that serves retailers, merchants, and large financial institutions such as banks and credit unions. Fiserv has two main business components. The payments segment provides electronic bill payment services, internet and mobile banking software, and debit and credit card processing. The financial segment provides financial institutions with account processing services, loan origination, and cash management and consulting services.
- Founded in 1984, headquartered in Brookfield Wisconsin, (U.S.A.)
- CEO: Jeffery Yabuki
- Number of employees: 24,000
- Market Cap: $33.4bn- EV: $38.5bn
- LTM Revenue: $5.7bn - LTM EBITDA: $1.87bn
- LTM EV/Revenue: 6.7x - LTM EV/EBITDA: 20.7x
Company Details (First Data Corporation)
First Data is a financial technology firm that is one of the world leaders in providing electronic commerce solutions for merchants, financial institutions, and card issuers worldwide. The company offers retail point-of-sale merchant acquiring and e-commerce services, as well as its cloud-based Clover POS operating system. The company handles 40% of all US credit and debit transactions.
- Founded in 1971, headquartered in Atlanta, Georgia, (U.S.A.)
- CEO: Frank Bisignano
- Number of employees: 22,000
- Market Cap: $23.5bn - EV: $43.6bn
- LTM Revenue: $8.6bn - LTM EBITDA: $3.02bn
- LTM EV/Revenue: 5.1x - LTM EV/EBITDA: 14.4x
Projections and Assumptions
Short term consequences
The combined company projects free cash flows (FCFs) to exceed the $4 billion threshold by year three of the deal closing; the trailing 12 months ending of 30/9/2018 Fiserv’s and First Data’s FCF was $1.2 billion and $1.5 billion respectively. The combined company will use its strong FCFs to pay down the $17 billion in net debt that First Data has on its books due to the debt saddled on by the private equity group KKR when it took First Data private in 2007 in the largest payments LBO ever. Though Fiserv, with its modest debt levels, could have probably used debt to finance this acquisition, by giving up stock to acquire First Data, shareholders of both firms are now invested in seeing synergies materialise and successful business integration. Though the share dilution isn’t pleasant for current Fiserv shareholders, the combined company can now use their excess cash and low cost of debt servicing to continue investing in innovative technologies and distribution at a greater scale.
The company also plans to save almost $900 million in run rate cost synergies, over the next five years, due to eliminating duplicative corporate structures, streamlined technology and operational efficiencies. However, the lack of overlap between the two firms presents challenges when trying to consolidate operations.
Long term upsides
The war on cash is still in its beginning stages. Consumers are increasingly using debit and credit cards to purchase small and large ticket items. Because of this, it is imperative that Fiserv takes a bigger step into “merchant acquiring” - the industry that collects card based payments from retailers - in order to take advantage of this surge in electronic payments. Merging with First Data, the leading merchant acquirer, will give them a large foothold into that space. The combined company predicts that 58% of their EBITDA will come from providing comprehensive merchant acquiring business solutions such as their cloud based POS system (Clover). Though these companies have a degree of different products and client bases, combined, they serve over six million businesses and over 4,000 financial institutions. In order to take advantage of potential synergies, Fiserv and First Data must crossell to one another’s clients and merge their respective technologies to further enhance their technology. For example, First Data’s digital merchant account enrollment capabilities can be integrated into Fiserv’s digital banking solutions that serve thousands of financial institutions. Moreover, First Data corporate clients will benefit through Fiserv’s biller solutions.
Another tremendous opportunity is that First Data is the world’s largest third-party credit-card-issuer processor. The company's STAR Network provides nationwide domestic debit acceptance at more than 2 million retail POS, ATM, and online outlets for nearly a third of all U.S. debit cards. First Data also serves six million merchants - the largest in the payments industry. This results in the combined company now being able to service all parts of the payment ecosystem; Fiserv will provide the software to ‘acquiring banks’ (large banks that serve merchants) and big retailers. They will also be able to use First Data as the ultimate bank processor for SMEs. This is an interesting hedge that will pay off if the company can continue to execute in providing simplified payment solutions.
Though Fiserv earns 95% of their revenue from their North American operations and 5% internationally, First Data earns 22% of their top line from overseas (APAC 4%, LATAM 5%, EMEA 13%). This signifies a big opportunity for Fiserv, if they are willing to tap into First Data’s large international presence thus providing them with a larger market to sell their services. Back in March, 2018, First Data announced a partnership with RBL Bank, one of India’s largest card issuers, as a way to enter one of the fastest growing digital payment economies. It had already been serving the top international banks and corporations in India before then. It will be interesting to see whether the combined company will seek greater opportunities outside of North America, given that Fiserv was established nearly 35 years ago and is considered a mature company in a constantly changing industry.
Risks and Uncertainties
The fintech sector has seen high-growth payments enterprises like PayPal, Stripe, and Square gain increased market share as their businesses are more focused and specialized. Take for instance Square. Once it was a simple payments processor for SMEs at your local farmers market and now they are continuing to service much larger retailers and compete against traditional banks. This is immensely concerning because Fiserv will now compete with Square on two fronts. Firstly, Fiserv will now provide a competing POS system to merchants (Square vs Clover). Secondly, as fewer SMEs use traditional banks in lieu of fintech companies that act as a type of lending source (Square Capital), Fiserv’s core business of servicing banks will inevitably take a hit. The decreased demand of traditional banks by SMEs poses a critical threat to Fiserv’s business as they have historically made money by providing financial institutions such as banks and credit unions with software solutions.
Combining two large and heterogeneous companies poses some serious concerns about successful integration. However, combining two companies in which one company (First Data) has $17 billion in long-term debt, all of which needs to be paid off within the next five years, with a debt-equity ratio of 5.92 is even more problematic. Though the combined company plans to refinance, the serious concern is that paying off this large amount of debt will take away from further investment in the firm. Moreover, even with the these large debt payments, the combined company expects EPS to increase by 20% after the first year of the deal closing and 40% when synergies fully materialize. This accretive acquisition could be seen as ‘EPS bootstrapping’, in which Fiserv purposely bought First Data with a low P/E ratio through a stock swap transaction in order to boost the post-acquisition EPS of the combined company thus pushing up its stock price (between January 16th-February 8th, Fiserv shares are up roughly 16%). Though, the company might not have financially engineered this acquisition to boost their stock price, it is important to be cognisant of the fact that the immediate boost in EPS will come from the increase in earnings without a proportional increase in shares outstanding and not due to value creation through synergies.
In today’s world in which financial technology is such an integral part of everyday life, the need to constantly innovate is paramount. Since Fiserv’s inception in the mid-80’s the company has been steadily acquiring smaller competitors to broaden their portfolio of fintech products. However, this is a double edged sword. On one hand, having differentiated products lends itself well to companies seeking to use one provider for all their financial technology needs. On the other hand, given their massive size, it might take longer than expected to deliver the expert and personalized attention to all of their clients like many of their more nimble competitors.
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