First Data-InComm Deal Appears To Be Casualty of Economic Tailspin

A slumping economy appears to have been what scuttled First Data Corp.’s deal to buy prepaid card program manager InComm Corp. The agreement, announced in April (Digital Transactions News, April 29), involved transaction-processing giant First Data acquiring Atlanta-based InComm for $980 million, with a further payout of $250 million over three years if performance goals were met (Digital Transactions News, May 19). But the two companies announced late on Tuesday that they had called off the deal and were instead entering a distribution agreement that among other things would allow First Data merchant clients to sell products through so-called prepaid card malls managed by InCommn
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Neither company gave a reason for squelching the acquisition. First Data will not comment beyond Tuesday’s terse announcement, a spokesman tells Digital Transactions News. Meanwhile, an InComm spokeswoman says the company is “not giving out any details” regarding the decision. “The companies mutually agreed to terminate the planned acquisition, but we will not disclose details of the agreement,” the First Data spokesman says in an e-mail message. “InComm remains a strategic partner, and we look forward to continuing our relationship with them.”n
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But the year-long downturn in the economy, which took a sudden and dramatic turn for the worse in recent weeks with a collapse in both debt and equity values, may have compelled Denver-based First Data to reconsider. The deal’s rich price surprised analysts when the company disclosed it this spring just months after buyout firm Kohlberg, Kravis, Roberts & Co. took on $22 billion in debt to finance its $29 billion acquisition of First Data. The processor in May said it would finance the InComm deal with stock plus $665 million in cash, including $250 million in equity capital from KKR affiliates and $415 million from a revolving-credit facility.n
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The downturn, though, “forced them to not put that kind of money” into the InComm acquisition, says Adil Moussa, an analyst with Boston-based researcher Aite Group LLC. He points out that as consumers spend less and perform fewer transactions on cards, processors are likely to earn less revenue while having to maintain a fixed-cost processing infrastructure. The souring economy, he says, “is going to force everyone to put a lot of things on hold.”n
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Still, while Tuesday’s announcement was sketchy, the companies said they would seek to gain through a distribution agreement at least some of the benefits the acquisition would have brought. Along with joint processing and program management, they signed a deal that will let First Data merchants sell prepaid cards in in-store displays managed by InComm. Expanded retail distribution for prepaid products was one of the key objectives First Data cited this spring when it announced it would buy InComm. “They already have [distribution] contracts in place,” says Moussa. “They can get the same thing without spending the money” on an acquisition.n
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Indeed, while considering the impact of the broader economy, First Data may have come to value InComm’s extensive distribution network more highly than the company’s systems, says Red Gillen, a senior analyst with Celent LLC, Boston. “One could infer that First Data felt their technology is at parity (or better) than InComm’s, or that the acquisition price to gain InComm’s technology was considered too high,” he notes in an e-mail message to Digital Transactions News.n
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InComm, which started out in 1992 as a processor of prepaid long-distance service, supports prepaid transactions at some 145,000 merchant locations, including those of national retailers like Lowe’s Cos. Inc. and Staples Inc. The company distributes and processes for gift cards and prepaid wireless cards, and handles digital music downloads and bill payments. It earned net revenues of $300 million last year on $8 billion in transactions processed.n
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InComm also processes reloads for network-branded prepaid cards, a crucial function as national networks like Visa Inc. and MasterCard Worldwide seek ways to garner more transactions from prepaid cards by allowing cardholders to keep their cards and load more value onto them. In 2006, InComm struck a deal with MasterCard to support transactions on MasterCard’s reload network, called rePower.