The Bigger Picture Behind the Fiserv-First Data Deal

January 24, 2019

MONTHLY ANALYSIS

Fiserv buying First Data in an all-stock, $22 billion-dollar deal has been one of the biggest news pieces of 2019. Following the close of the transaction, Fiserv shareholders will own 57.5% of the combined company, and First Data shareholders will own 42.5%, on a fully diluted basis.

The companies have very optimistic expectations for this merger. The transaction is expected to generate at least $500 million of revenue synergies over a five-year period. The combined company expects to generate significant free cash flow exceeding $4 billion in the third year following the close, including synergies.

Additionally, the combination is expected to generate approximately $900 million of run-rate cost synergy savings over five years, driven primarily by the elimination of duplicative corporate structures, streamlined technology infrastructure, increased operational efficiencies, process improvements, and footprint optimization.

While the details of the announcement are certainly interesting, there is a bigger picture to this landmark deal that catches the eye.

Fiserv buying First Data was neither about Fiserv nor First Data, it was about KKR

This acquisition was arguably brewing for over a decade and it’s all about a private equity firm KKR, which acquired First Data in 2007 for about $26 billion in a deal that was almost entirely financed with debt. From 1992 to 2007, it traded on the NYSE before being taken private by KKR. At the time of the purchase in 2007, Citigroup, Credit Suisse, Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs, and Merrill Lynch have committed to provide debt financing for the deal and were advising KKR.

When KKR took First Data private in 2007, it paid the equivalent of $15.81 a share. After the IPO in 2015, shares traded at around $16. It suffices to say that for KKR – which owned 60% of the company along with its investors at that time – the investment didn’t have too much of a return. Throughout its history, First Data has been buying companies left and right: Clover, Perka, Gyft, Blue Pay, Spree and more. The company represented a significant debt burden for KKR. In the first half of 2015, First Data had interest expenses of $813 million.

It’s possible that KKR was simply dying to sell the debt-ridden First Data, which at times weighed down the firm’s overall profitability in the ensuing years before it began unloading shares through secondary offerings in 2017 and 2018.

In the pre-KKR time, a series of chief executives couldn’t turn First Data around. Then in 2013, Frank Bisignano started to run the company. According to Reuters, after KKR and co-investors sank another $3.5 billion into First Data in 2014, Bisignano and improving economic conditions helped the company regain strength to take it public a year later. The company and the owner have struggled ever since. The first decade of ownership was a lost one for investors including the private equity firm led by Henry Kravis. They then collected about $3.4 billion selling shares in 2017 and 2018, leaving the group about $6.4 billion short of recovering their money – that is roughly what their combined 39% stake in First Data was worth the day before Fiserv’s acquisition was announced.

It’s understandable that given the known risks associated with the size of the company and the deal, Fiserv opted to use its equity rather than borrow at low rates to make an all-cash acquisition. Upon the deal’s closing, KKR’s ownership stake in First Data will drop from 39% to 16%.

With the purchase, Fiserv will have to refinance the approximately $17 billion of debt that First Data is expected to have at the time of closing (with only $601 million in cash). Fiserv has entered into a committed bridge financing arrangement in connection with the transaction. Remember that increased free cash flow that Fiserv is expecting as a result of this merger? The company wants to utilize it to reduce the newly acquired debt to a level generally in line with Fiserv’s historical performance within 24 months after the transaction closes.

The Fiserv-First Data merger plays out the larger trend of market consolidation

Everything new is well-forgotten old. Consolidation in the financial services industry has a long history and the Fiserv-First Data merger is another testament to history continuously repeating itself. The merger underscores the general trend of consolidating complementary parts of the financial services ecosystem, providing a one-stop-shop to clients, and building more integrated services overall.

Today, the largest and most successful financial technology companies are repeating the history of Visa and a number of the most powerful financial institutions. It’s interesting how former innovators and disruptors are making a full circle to become the new monopolists. There is one difference though – the consolidation in banking happened among direct competitors, while consolidation among financial technology companies is happening among complimentary services.

Some of the most successful FinTech companies follow the path of growth through acquisitions and acqui-hires:

  • First Data acquired payment processor CardConnect and BluePay, a provider of technology-enabled payment processing for merchants in the US and Canada

  • Ant Financial put forward an 880-million-dollar bid for the acquisition of MoneyGram (although was denied the opportunity)

  • PayPal acquired payment management company TIO Networks

  • Vista Equity Partners struck an agreement to purchase Canadian financial solutions software supplier D+H

  • Mastercard has won the CMA’s approval to acquire payments systems company Vocalink

  • Payments company Worldpay made a $10.4-billion acquisition offer to processing company Vantiv

  • Swedish FinTech unicorn Klarna acquired BillPay, which has been labeled the PayPal of Germany

  • Moneyfarm, the UK-headquartered digital wealth manager, acqui-hired the technology behind personal finance chatbot, Ernest

  • FinTech lender Qbera has partnered with online automobile marketplace Droom to enable loans for vehicle purchases on the latter’s platform

  • Navient, one of the largest US companies that collects payments on student debt, bought Earnest as a launching pad for Navient to begin originating its own student loans

There are many more examples among which you won’t find micro-players for a very good reason – consolidation happens among the strongest. Companies with the most traction, resources, and potential, seek powerful alliances to expand into new niches, touch new customer segments, and ultimately, strengthen their market position.

To expect complimentary services to remain proprietary to separate entities would mean to misunderstand the importance of scale and convenience when it comes to delivering and consuming financial services.

There is a significant downside to this trend and this particular merger though. The new company will have the scale to monopolize and dominate the industry.

Smaller banks and credit unions are at a particular disadvantage of this merger and the trend overall. As technology providers become one-stop shops, driving specialized competition out of business or at least damaging their chances at a larger market share, community banks, and credit unions risk getting locked into longer contracts, integrating solutions that lock out other providers, and losing any bargaining power when it comes to pricing. Diminishing competition lightens the pressure to innovate, putting the customer at a disadvantage – again.

Both Fiserv and First Data are massive players. Today, more than one in three US financial institutions rely on Fiserv for core processing services. More than $75 trillion moves through Fiserv solutions annually.

Fiserv supports:

  • 135 million deposit accounts

  • More than 6 million credit accounts

  • 65 million debit cardholders

  • More than 80 million online banking end users

  • More than 22 million mobile banking end users

  • More than 25 million active bill payment end users

Fiserv has more than 140 patents issued and pending for financial services technology solutions.

First Data’s digital merchant account enrollment capabilities can be integrated into Fiserv’s digital banking solutions that serve thousands of financial institutions. First Data currently serves approximately 6 million business locations and 4,000 financial institutions in more than 100 countries around the world. The company is processing more than 3,000 transactions per second and $2.4 trillion per year.

The deal signifies a push into payment processing for Fiserv, which helps thousands of regional banks offer bill payments and electronic payments services, in addition to handling the back-office functions of credit and debit card transactions. The firm also helps banks implement Zelle. The combination of Fiserv and First Data creates a powerful player in an already gradually consolidating market of financial services.

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