First Data Cuts Data Centers As Its Road Show Starts

First Data Corp. is giving more glimpses of its previously announced plans to tighten up operations as top management and private-equity firm Kohlberg Kravis Roberts & Co. struggle to meet a planned Sept. 30 closing date for KKR's $29 billion leveraged buyout of the No. 1 payments processor. In a filing yesterday with the Securities and Exchange Commission, Greenwood Village, Colo.-based First Data said it planned to take a $125 million to $150 million charge as it consolidates data centers and so-called command centers, and outsources technology development worldwide in order to achieve savings of $150 million by the end of 2008 and possibly more later. The filing makes reference to the many processors and other payments companies First Data has bought over the years, especially since the mid-1990s when the company embarked on a big expansion of its merchant-processing business. “We currently maintain a large, under-utilized capacity of data centers and command centers, many of which have been assumed as part of historical acquisitions,” the filing says. “This fragmentation and under-utilization represents a significant opportunity to reduce costs through consolidation. We are in the process of consolidating our 12 data centers and seven command centers in the United States into three data centers and two command centers over the next several years. We also expect to reduce data- and command-center locations significantly in First Data International over the same period. In addition to achieving consolidation cost saving benefits, we are concurrently upgrading our technology infrastructure.” Command centers are facilities where First Data oversees direct links between its clients and merchants, according to consultant and former First Data executive Kurt Strawhecker, managing director of Omaha-based The Strawhecker Group. “You think of the NASA control center; it's a mini version of that,” he says. The filing says First Data has about 6,600 people globally in technology functions, about 90% of whom are direct employees. The company believes many of those jobs could be outsourced, though the filing didn't say how many or to where. “We are presently implementing an outsourcing initiative to more efficiently compete on a global scale, better utilize our global talent and footprint, and leverage the labor pool in lower-cost locations,” the filing says. First Data chief executive Henry C. “Ric” Duques, who will retire when the buyout is done, started talking publicly about tightening up operations last year. In its 2006 annual report, First Data said the domestic side of the project could take up to two years. The data-center component could cost $225 million (Digital Transactions News, May 9). Outsiders familiar with First Data say processing-center consolidation makes sense, but may not go far enough if it also doesn't include the disparate technology platforms that came under First Data's umbrella as it bought other processors. Allen Weinberg, another former First Data exec who is now managing partner of Glenbrook Partners LLC, Menlo Park, Calif., estimates First Data has up to 13 so-called front-end platforms for authorization, clearing, and settlement. The plethora of platforms makes the jobs of software developers and other technology personnel at the card networks and other firms that handle transactions going through First Data more difficult, he says. “These guys have to open up the hood on the front-end systems just to do anything,” Weinberg says. He adds that First Data probably has six or seven back-end platforms for statement production, fraud control, chargeback processing, and other functions. Some of First Data's recent filings have mentioned platform consolidation but provided few details. “That point is still being worked on,” a spokesperson says. Platform reduction is probably a tougher job than merging processing centers because it involves changes in merchants' systems, processing experts say. “They have been looking at consolidating platforms, [but] that's become much more complex than perhaps management assumed,” says Strawhecker. Steve McLaughlin, managing partner of San Francisco-based Financial Technology Partners LP, a boutique investment bank, adds, “Whether or not the company sells, it's been a wake-up call to ignite change the within the company.” That said, McLaughlin thinks the KKR deal will go through. The First Data spokesperson says the company made the filing in conjunction with a so-called road show that began on Monday in which Duques, incoming chief executive Michael D. Capellas, and KKR executives are trying to sell investors on the deal announced April 2. At the time, LBO funding was plentiful, but since then investors have been spooked by troubles in the subprime mortgage market. Those new fears are making financing for LBOs tougher, and the financial press, which has reported that First Data's bankers have made some concessions, is closely watching the First Data-KKR deal as a bellwether for other buyouts. The First Data spokesperson says the company still anticipates meeting its stated planned close of Sept. 30 or earlier.