First Data, Square Mull IPOs

PayPal Inc. may soon be joined by leading payment card processor First Data Corp. and upstart merchant processor Square Inc. as the newest members of the club of publicly traded payments companies.

In a long-anticipated move, First Data filed a registration statement July 20 for an IPO. The filing gave no information about some key matters, such as how much money First Data hopes to raise, but the company did say it plans to use the proceeds to pay down some of its $20.6 billion in debt.

Legendary Wall Street investment firm Kohlberg Kravis Roberts and Co. bought First Data in 2007 in a $29 billion leveraged buyout, the last big LBO before the gathering financial crisis slammed the door on such deals.

Under a proposed two-tier common-stock plan, KKR will still control the majority of First Data’s voting power after the IPO, the filing says. The registration statement did not say when the IPO, should First Data go through with it, will occur.

First Data had $11.2 billion in revenue in 2014, a $1.4 billion operating profit and a $458 million net loss, mostly because of debt-service costs. Analysts say reducing the debt load will provide the processor with more cash to pursue acquisitions, develop new products and expand into high-growth countries. The New York City-based company currently gets about 75% of its revenues from the U.S.

“What they needed to do and still need to do is [be] a more compelling growth story,” says long-time First Data observer Eric Grover of Minden, Nev.-based Intrepid Ventures. “They need to be more international. The U.S. is overwhelmingly the dominant market.”

Adds Allen Weinberg, founder of Menlo Park, Calif.-based Glenbrook Partners: “In theory they should be able to free themselves up from what was pretty significant debt at some level, restricting the amount investment they were making. This should free them up in a way [that] we might be seeing more in terms of acquisition, and investment in new technology.”

Meanwhile, according to reports in the financial press, San Francisco-based Square in late July filed for a confidential IPO under the Jumpstart Our Business Startups (JOBS) Act, a 2012 federal law that enables companies with less than $1 billion in annual revenue to explore early investor interest in them without publicly disclosing full financial details. Square declined to comment.

Square initially catered to the micro-merchant market with a card reader that attached to a smart phone, but has since added services that larger merchants would use, such as cash advances, a dashboard app to track sales data, payroll, and peer-to-peer money transfers for businesses. The company reportedly is processing about $30 billion in annual volume.

“Competition in this space is intense and increasingly visible, and payments companies are hot right now,” Thad Peterson, senior analyst at Boston-based Aite Group, says by email. “It’s a good time for Square to generate capital to move to the next level and to benefit from the value that they have created over the past few years.”

A major issue for Square is who will be calling the shots. Chief executive Jack Dorsey, who co-founded Twitter Inc. and was its first chief executive before founding Square in 2009, in June began filling in as interim CEO at his struggling old company while its board searches for a permanent one to replace the departed Dick Costolo.

Dorsey has been dividing his time between Square and Twitter, but Twitter’s search committee has let it be known that it wants a permanent CEO’s undivided attention. As of mid-August, Dorsey hadn’t said whether Round 2 at Twitter will be a short- or long-term affair.

—With additional reporting by Kevin Woodward