Behind the Acquirers’ M&A Spree

Five leading U.S. merchant processors have spent more than $5.4 billion buying other companies in the past two years. New tech and new channels have a lot to do with the shopping frenzy.

Time was, when a merchant processor set out on the acquisition trail, it usually was hunting for an independent sales organization or other processor that would bring it scale—more accounts and more transactions to process that would lower its unit costs and leverage its fixed capital investment. But the merchant-acquiring industry has consolidated so much that there are now far fewer small fry left in the pond for the bulked-up fish to swallow.

“The stuff being available in the traditional realm, there isn’t that much remaining out there,” says payment-processing consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures.

Instead, these recent acquisitions and those in the near future are likely to reflect the buying companies’ desire to obtain special technology, business relationships, and distribution channels that they didn’t have before. In other words, companies that can bring new products and services complementary to a buyer’s merchant-processing base.

Digital Transactions analyzed recent U.S. acquisitions by five leading merchant processors—First Data Corp., Total System Services Inc. (TSYS), Vantiv Inc., Global Payments Inc., and Heartland Payment Systems Inc. The group has spent more than $5.4 billion in 18 publicly announced domestic deals since 2012. Only a few of the acquisitions could be described as old-fashioned scale plays that simply added more payment card merchant accounts to the buyer’s portfolio.

‘Naturally Complementary’

The current leader in the merger-and-acquisition race is Vantiv, a publicly traded firm that started its corporate life as the payment-processing division of Cincinnati-based Fifth Third Bancorp. Vantiv since 2012 has made three acquisitions worth $2.17 billion, including its $1.65 billion buyout of Mercury Payment Systems in June.

Vantiv’s acquisition strategy reflects much of the current M&A thinking.

“Honestly, the unifying thread is the tremendous and rapid revolution we’re seeing in the payments industry toward technology-enabled payments,” says Adam Coyle, executive vice president of acquisitions and strategy.

Durango, Colo.-based Mercury is considered the pioneer in so-called integrated payments—an ISO that works with software developers and dealers to integrate payments functions into the partners’ business-management applications. The idea is to present merchants with an offering beyond increasingly commoditized and price-driven straight merchant processing.

With Mercury’s proven model in mind—its distributors include 600 software developers and 2,400 value-added resellers (VARs)—other merchant processors are looking for partners that offer applications for everything from marketing to inventory and personnel management.

“They’re naturally complementary to a merchant-acquiring business,” says Grover.

Integrated payments aren’t the only thing driving processor acquisitions lately, however. Mobile-payments platforms are targets. Some big acquirers are eyeing niches dominated by small players and ripe for rollup. Other processors have moved into substantially different corners of the payments industry than they were in before—witness TSYS’s $1.4 billion acquisition of prepaid card program manager NetSpend Holdings Inc.

Foreign countries where electronic payments are relatively underdeveloped hold the most acquisition opportunities in the coming years, according to many payments executives. With the exception of Heartland, all the companies discussed here pursue international acquisitions, most recently Global Payments with its September announcement that it had a deal to buy Ezi Holdings Pty Ltd. (Ezidebit), a processor serving Australia and New Zealand, for about $268 million.

What Lies Ahead

But foreign acquisitions are another story. While the U.S. payments market is comparatively mature, there’s little disagreement that it still has plenty of attractive buyout prospects. What follows are brief reviews of the five big processors’ recent domestic acquisitions, what was behind them, and what may lie ahead for payments-related mergers and acquisitions.

Vantiv ($2.17 billion)

Symmes Township, Ohio-based Vantiv’s acquisition of Mercury is the biggest single buyout of the 18 noted here. But Vantiv has made other deals that have greatly expanded its reach since it was the bank-owned Fifth Third Processing Solutions, which included debit card and issuer processing and a substantial portfolio of national merchants complemented by thousands of small merchants recruited through Fifth Third’s branches.

Fifth Third Bancorp sold a 51% stake in the processing unit to private-equity firm Advent International in 2009, and the company went public in 2012. In 2010, not long after the Advent investment, Fifth Third Processing bought National Processing Co., adding 400,000 mostly small-merchant locations to its portfolio.

In 2013, by then renamed Vantiv, the company bought Element Payment Services, an ISO that focused on software developers, for nearly $163 million. Near the end of 2012, Vantiv bought Litle & Co., a major e-commerce processor, for $361 million.

Although far smaller than the Mercury deal, the Element acquisition has similarities in its tech orientation. “They start as merchant ISOs and sales organizations,” says Coyle. “That’s where Mercury got its start, that’s where Element got its start.”

In online payments, Vantiv had “a weak e-commerce offering” until it bought Litle, says Grover. With the NPC, Element, Litle, and Mercury acquisitions, the company has grown in traditional point-of-sale acquiring as well as related acquiring sectors, he adds.

“They’ve grown their core, existing business [and] they’ve pretty dramatically increased the channels they have to reach the market,” he says.

What’s next? Coyle is coy.

“We continue to be believers in the technology-enabled payments space and the continued growth and adoption of integrated-payments technology,” he says. “We look for opportunities as they present themselves. Sometimes we find them, sometimes they come to us.”

TSYS ($1.59 billion)

This Columbus, Ga.-based processor’s biggest business is serving credit and debit card issuers. It also had been a sizable third-party merchant processor until it got into direct merchant acquiring with its 2010 formation of a joint venture with First National Bank of Omaha. TSYS bought the 49% of the joint venture the bank owned in 2011 for $170 million. Since then TSYS has bought ProPay Inc., an ISO, and has taken a 75% stake in another, Central Payment Co. (CPay), paying at least $190 million for the two.

But the company’s NetSpend acquisition was what really turned heads. On the one hand, it gave TSYS a major player in the fast-growing prepaid card market. But it also took the company into new territory by giving it 2.4 million consumer accounts. Before, TSYS had been strictly a business-to-business company.

“It’s a tough business, competitive; it’s a growth business,” says consultant Grover. “But it’s very different than their core traditional business.” TSYS declined to comment for this story.

NetSpend brought in $116.8 million in revenues for TSYS in the second quarter, up 11% from a year earlier, and operating income of $30.7 million, up 26%. The NetSpend deal came at a time when TSYS’s issuer-processing business, like First Data’s, faced tight margins, and the company had lost Bank of America as a merchant-processing client, according to Grover.

“So there’s a need to demonstrate to the market a U.S. growth story,” he says.

Global Payments ($1.08 billion)

It’s almost been a tit-for-tat between Vantiv and Atlanta-based Global Payments, which had been Mercury’s processor, in integrated payments. Looking beyond its price-sensitive processing business with traditional ISOs, Global in October 2012 paid $413 million for Accelerated Payment Technologies (APT). APT worked with 700 VARs. That deal was followed by Global’s buyout of Payment Processing Inc. (PayPros) this year for $428 million. PayPros serves 58,000 merchants through a network of 1,000 software providers. Last month, Global combined the APT and PayPros operations into one unit called OpenEdge.

At its Oct. 2 quarterly earnings call, Global Payments president and chief operating officer David E. Mangum told analysts that OpenEdge has about 2,000 partners operating in 50 to 60 vertical industries, but only 25% of the businesses the partners serve are actually processing payments through an integrated solution. “So we think we’ve got a long runway ahead for growth,” said Mangum. He also noted that while pricing for traditional merchant processing remains “highly competitive,” with integrated-solutions merchants “we have seen very little incremental pricing pressure.”

Global Payments also is beefing up a business it already was in—check-cashing and related payment services for casinos. The company on Oct. 1 announced a deal to buy the gaming assets of Certegy Check Services, a subsidiary of processor Fidelity National Information Services Inc. (FIS), for $236.5 million pre-tax. Certegy serves 260 of what Global calls “marquee gaming client locations” that generate about $50 million in annual revenues and will complement Global’s similar service, which is growing in the high-single-digit range, according to Mangum.

While it is still prowling for buyouts abroad, Global will be taking a breather on domestic acquisitions, chief executive Jeffrey S. Sloan said at the earnings call in response to an analyst’s question about its M&A pipeline.

“It is fair to assume there’s not a lot more coming of any size in the North American marketplace imminently,” Sloan said.

Heartland Payment Systems ($520 million)

Princeton, N.J.-based Heartland is a leading example of an ISO that grew big and set its sights on technology. It developed its own line of data-encrypting terminals after its massive data breach in 2008. More recently, in August, it bought Leaf Holdings Inc., developer of an open-platform, tablet-based point-of-sale system. Leaf, which uses a software-as-a-service model, gives Heartland a direct competitor to services from Square Inc., First Data with its Clover Station, and other acquirers pursing small businesses that want to use mobile devices for business-management and payments functions.

“That in itself has been a trend—you see Harbortouch (a tech-oriented ISO) and First Data want to own platforms,” says Steve McLaughlin, chief executive of Financial Technology Partners, a San Francisco-based investment firm that has brokered many deals in the payments industry.

But through acquisitions of small firms such as MCS Software and Lunch Byte Systems, Heartland also is going where no big merchant acquirer has gone before, into specialty processing services for schools. Heartland’s School Solutions division now serves 34,000 kindergarten through grade 12 public schools, about 36% of the total, with cafeteria payment processing and online systems for parents to pay for everything from bus service to uniforms to dues for athletics and school organizations.

“We like that business,” says Heartland chief executive Bob Carr. “We believe more and more parents will want to get away from sending checks into the school.” Merchant, in this case school, retention is high in the sector, he adds.

Heartland has a parallel business with its Campus Solutions unit. Its $375 million acquisition of TouchNet Systems Inc. in September brought 600 colleges and universities with 6 million students under Heartland’s wing—nearly a third of the nation’s higher-education enrollment. The late-2012 acquisition of Educational Computer Systems Inc. added 1,800 schools to Heartland’s client base.

Payroll processing is another growth market for Heartland, which started its own payroll service in 1999, grew it organically and supplemented it with its first acquisition by buying payroll and tax-services provider Ovation Payroll Inc. nearly two years ago for $44 million. Carr isn’t done; he wants to take on such established industry powerhouses as ADP, Ceridian and PayChex.

“We want to be one of the top five payroll processors,” says Carr. “It’s going to take a few years.”

Heartland operated a merchant-processing business in Canada for about five years, Collective POS, but sold it in 2013 to U.S. Bancorp’s Elavon acquiring subsidiary. Carr doesn’t rule out future international expansion if the right deal comes along, but says “right now the domestic market has plenty of opportunity for us.” He adds: “We are looking at some new things, but nothing I can speak about publicly.”

First Data ($82 million)

Somewhat ironically, the nation’s largest payment processor has spent the least among its cohorts on publicly-announced U.S. acquisitions since 2012—$82 million. That sum, however, doesn’t include the undisclosed amount First Data paid for its recent acquisition of digital gift-card platform developer Gyft Inc. It’s possible First Data might reveal the price in a future Securities and Exchange Commission filing.

Analysts point to First Data’s heavy debt load, $22.6 billion, as a result of its 2007 leveraged buyout by Kohlberg Kravis Roberts & Co. as the main reason it’s been a relatively infrequent domestic buyer. “They’re still grossly over-leveraged,” says Grover. First Data also declined comment.

Still, First Data’s recent acquisitions have increased its technological prowess and complemented its core services. First Data already had a big prepaid card business, so the Gyft digital platform seems like a natural extension.

As noted, the acquisition of Clover Network with its Clover Station product gives First Data a strong offering in mobile POS services. The 2013 acquisition of Perka added mobile marketing and loyalty services to First Data’s product list.

The big fish in merchant acquiring have gobbled up hundreds if not thousands of small processors, tech companies, and other suppliers in the past four decades. With technology and market conditions continuing to change rapidly, it’s a safe bet that M&A activity will be brisk far into the future.