If Spun off, Would Metavante Remain Independent for Long?

Barely a day after industry-leading processor First Data Corp. announced that it was going private comes word that the Milwaukee bank-holding company that owns Metavante Corp. is dusting off plans to spin off its fast-growing payments subsidiary. According to The Wall Street Journal, Marshall & Ilsley Corp. is planning a $4 billion deal that will include a tax-free distribution of shares in Metavante to M&I shareholders and a minority ownership stake by New York City-based Warburg Pincus. A Metavante spokesperson could not be reached for comment. M&I had planned to spin off Metavante seven years ago, but shelved the plan as the stock market sank. Like the First Data deal announced Monday, a Metavante spin-off could be a way to increase value for M&I's shareholders. “I suspect it was shareholder pressure” that led to the deal, says Aaron McPherson, research director for payments at Framingham, Mass.-based Financial Insights, an IDC Co. The pressure for a higher stock price may have trumped other considerations in favor of keeping Metavante. Those include high profitability and steady cash flow. Metavante accounts for a large share of M&I's revenues and earnings, and the Metavante-owned NYCE electronic funds transfer network itself accounts for 40% of Metavante's $3.4 billion in revenue and 20% of its $1.2 billion in pre-tax earnings, according to the Journal. At the same time, an independent Metavante may prove a tempting target for other processors or private-equity firms looking to accumulate assets in electronic payments. The NYCE network has apparently ballooned in value with the steady growth of debit card usage. Steve Mott, principal at researcher BetterBuyDesign, Stamford, Conn., figures the EFT network is worth more than $1 billion, or almost twice the $610 million Metavante paid for it in 2004. “EFT networks look like sure winners for now in the race to accumulate payments assets,” says Mott in an e-mail message to Digital Transactions News. Overall, the highly acquisitive Metavante operates what might be the widest-ranging processing shop in the electronic-transactions business, including check-image exchange, merchant acquiring, bill-payment, gift card processing, and a specialty unit called Link2gov that holds a contract with the Internal Revenue Service to process tax payments. “There's definitely parts of that business portfolio that will get people excited,” says Mott. First Data, meanwhile, may be attractive to the announced buyer, the Kohlberg Kravis Roberts & Co. private-equity firm, not only for its cash, but also its potential to be sold whole or in pieces at a tidy profit, according to McPherson. With banks encountering increasing risk in lending and a limit to their ability to grow fee income, a large bank might have an interest in all or parts of First Data, he says. “Banks have an interest in the steady cash flow,” he says. Banking behemoth JPMorgan Chase & Co. already owns 51% of Chase Paymentech Solutions LLC, the huge merchant acquirer of which First Data owns 49%.