Did Investors’ Failure to Understand ISO Business Lead to iPayment Offer?

A failure by major investors to understand the business model of an independent sales organization may have prompted yesterday's offer by Gregory S. Daily, chairman and chief executive of iPayment Inc., to buy all outstanding shares of the Nashville, Tenn.-based processor. The company, which went public in March 2003, closed today at $38.10 per share, down slightly from its close yesterday, during which heavy volume unleashed by the $640-million tender offer drove the stock up almost $7 per share. The stock closed last Friday at $31.55 a share, down about $20 from its 52-week high, despite strong revenue and earnings growth (Digital Transactions News, May 5) and what some analysts describe as strong free cash flow. “The question coming to mind more and more [in the market] was not whether iPayment's [stock] would collapse, but when,” says Paul Martaus, an acquiring-industry consultant. Daily, who owns more than 11% of the 16 million outstanding iPayment shares, may have acted to buy the rest because the market failed to recognize iPayment's value, some observers say. At least one expert says that if his tender offer succeeds, Daily is likely to sell iPayment later on to a major processor. Company officials are unable to comment because of a quiet period imposed by the offer. “The market does not understand [Daily's] value proposition,” says Martaus, who has met with investment bankers in the past to explain how acquiring works. He says major investor groups and stock analysts don't understand how acquiring processors do business, and may be looking for returns that fit in with other financial-industry stocks. “[Acquiring] is a basis-point industry,” says Martaus. “You can make it on very small margins, but it's on very large volume.” Some stock analysts fault iPayment for relying too heavily on an acquisition strategy while organic growth stalls. The ISO has executed a long string of deals over the past two years, including two major portfolio purchases from First Data Corp., that have swelled its merchant count to 130,000. Martaus agrees iPayment faces a growth challenge. Its sagging valuation makes it harder for the company to use its stock as a currency in making acquisitions, he says, while competitive forces hinder organic growth. The First Data deals were cash acquisitions financed by a line of credit. “Organic growth is an issue [for iPayment],” Martaus agrees. “[Daily] is fighting some fairly strong competition.” Martaus figures Daily will sell iPayment if he succeeds in taking it private. “Greg is doing this to sell to First Data or someone like that,” he says. The company has an agreement to process at least 75% of its annual volume with Denver-based First Data, and to pay it at least $13.7 million in processing fees in 2005. Daily has formed an entity for the purpose of acquiring the outstanding iPayment shares. His offer of $38 per share is before iPayment's board, which says it has only begun to consider it.