This week a financial powerhouse was born as Fiserv agreed to buy First Data for $22 billion in an all stock deal. The news comes as a surprise for many in an industry that doesn’t see transactions of this size very often. The combined company (which will go by Fiserv in a tragic waste of an opportunity to rebrand) forges a mammoth technology vendor attempting to prove that despite all the noise around young tech companies like Square and Stripe, old dogs can also learn new tricks. The big question is whether it is too little too late.
The clear winner in the near term is Fiserv. A major technology vendor on the issuing and payments side, underlying 140 million checking accounts and over 30 billion digital payment transactions, Fiserv is cannonballing into merchant acquiring on global scale. With pro forma revenue over double that of their biggest competitor FIS, Fiserv also now has access to the 4,000 First Data customers, mostly the long tail of banks and small financial institutions current outside of Fiserv’s core customer base, to sell to and pull away even further. The deal provides a clear path for international expansion, near term revenue growth and higher EBITDA which the Street will reward them for.
For First Data this is a capitulatory move, submitting to the very real challenges of running an acquiring business that is becoming increasingly commoditized. Saddled with debt after getting taken out by KKR over a decade ago, the stock gained under 10% in the more than three years since the IPO in 2015 despite the company being the largest global merchant acquirer, processing over 93 billion transactions annually. With First Data still the largest investment on KKRs balance sheet (the PE firm still maintained a 39% stake in the business post IPO), they finally seem to have agreed that the best path forward is within another organization — the end of a rocky journey that included numerous acquisitions in an effort to further innovate on top of a monster acquiring business. KKR will own 19% of the combined business.
The short term challenge for Fiserv is now making sure this cannonball doesn’t turn into a belly flop. Integrating the two businesses — a combined 48,000 employees with very distinct cultures and hidden skeletons — is an undertaking of massive proportion that will certainly be a major distraction and likely throw a wrench into any previously planned 2019 initiatives.
Following integration, the next and more important challenge will be product development. Tech first players like Square, Stripe, Adyen, Ant Financial and Tencent have fundamentally changed the financial services landscape, making good design and user-first product experiences table stakes. Despite processing a fraction of the amount of First Data and making less than 30% of the revenue of Fiserv, Square’s market cap was over 40% higher than First Data’s and only slightly less than Fiserv’s prior to the merger announcement. Stripe’s most recent valuation puts them just shy of where First Data is trading, and that’s despite having leveraged FDCs infrastructure for the majority of their time as a company! The market (both customers and investors) now demand continued innovation, leading from the front instead of attempting to follow fast which is the safe zone for banks. Focusing on product is going to be key to long term survival and attracting investors. To their credit, Fiserv announced they are going to be investing $500 million for incremental innovation. However, based on its current allocation —technology like digital enablement, next generation merchant solutions, advanced risk management, data focused solutions and ecommerce — I doubt $500 million is going to be enough.
As for the rest of the market this should serve as a warning — time to go big or go home. FIS is surely paying attention and likely contemplating a move of their own. Based on the common path legacy businesses have been taking — acquiring assets that help support the existing base instead of new market development — an acquisition of TSYS or even Worldpay by FIS is not out of the question. Not the move that’s going to be viewed as a real difference maker 10 years from now but better than nothing I guess. A truly game changing move would have been to buy Adyen or Stripe. If I were them now I would immediately go buy Plaid. This would couple a financially accretive deal in First Data with an innovation focused deal in Plaid. Fiserv would be able to play into the infrastructure for banks and financial services providers, and frame quite a compelling story: “We’ve powered banks and FIs for the last 35 years. With the acquisition of Plaid, we’re setting ourselves up to power it for the next 35 years.” Given Plaid’s most recent round, maybe $4 billion gets it done?
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