Motley Fool on Fiserv/First Data

The Motley Fool takes a deep dive on the merger:

The new Fiserv

Management of the two companies expects the acquisition to lead to $900 million in cost savings and $500 million in revenue synergies over a five-year period, and generate $4 billion in free cash flow by 2022. Let’s tackle these issues in order:

Cost savings. In the conference call with analysts following the deal’s announcement, Yabuki said, “We spent significant time and diligence validating these assumptions and expect the savings to come from a number of areas, including the elimination of duplicative overhead, streamlined and enhanced technology infrastructure, increased operational efficiencies, process improvements, and global footprint optimization.” However, when questioned by an analyst, he clarified that the “substantial majority” of cost savings would not be coming from platform consolidation, but from the “duplicative structures” that are inevitably present when any two large companies combine.

The more significant cost saving, though it is not included in the $900 million figure, will come from the refinancing of First Data’s debt. Fiserv has said it expects to refinance First Data’s approximate $17 billion debt immediately upon the deal’s closing. While that is still a lot of debt, the combined entity will be able to swallow that bitter pill a bit more easily than First Data alone. For the first two years after the acquisition, Fiserv will suspend its share buyback program to prioritize paying down that mountain of debt.

Revenue synergies.

In the conference call, Yabuki said, “Our revenue synergies will be driven by a focus on additional client value in areas such as bank Merchant Services and Clover, credit processing, expanded biller and payment services, along with many additional opportunities to innovate across our network.” Nearly $100 million of revenue will be seen in the first year alone, and Yabuki expects the deal to increase earnings per share about 20% in the first year.

While there is not a direct overlap between much of the two companies’ services, that doesn’t mean they don’t exist. Take Clover, First Data’s cloud-based, mobile point-of-sale solution. In First Data’s third quarter, Clover processed about $17.5 billion in payment volume, a 45% increase year over year. Banks that subscribe to Fiserv’s platforms can now offer Clover as a default point-of-sale option to their business accounts. As Bisignano put it, the deal “massively changes the distribution capability of Clover.”

Not your father’s payments industry

While all of the synergies listed above seem plausible, this move was all about Fiserv and First Data playing defense, not offense. It wasn’t too long ago that the payment processing industry offered a largely commoditized service to merchants with established storefronts. The arrival of upstarts, such as Square (NYSE:SQ), began to change all of that.

Square first offered mobile point-of-sale solutions, then moved to other innovative solutions, including giving merchants immediate access to their money (for a fee), payment processing solutions tailored to specific industries, and a business micro-loan platform. With Clover becoming a part of Fiserv, banks will have the same access to sales data that Square has and be able to offer loans to merchants in much the same way Square does now. For financial institutions losing market share to Square, that is a compelling proposition.

Fiserv is also facing renewed competition from upstarts such as Q2 Holdings (NYSE:QTWO), which is growing revenue much faster by offering digital expertise and cloud-based platforms to small banks and local credit unions.

While this deal does not solve all of these problems, it increases both companies’ reach into sectors where they previously had no presence. The interesting combinations and larger distribution channels might be enough to recharge growth and stave off disruptive upstarts a bit longer. While I’m not rushing to buy shares of either company just yet, once the acquisition is complete, the more-robust Fiserv will bear close watching by investors.

Posted by on January 22nd, 2019 at 9:41 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.