The Payments M&A Party Just Got Wilder

This one wasn’t hard to predict. Observers said Fiserv Inc.’s $22 billion bid for mega-processor First Data Corp. in January would trigger a wave of mergers in the payments industry—and sure enough, along came Fidelity National Information Services Inc. (FIS) on March 18 with a $43-billion cash-and-stock deal to acquire Worldpay Inc.

The biggest surprise was who paired up. Speculation had it that Total System Services Inc. (TSYS) might be the likely partner for FIS as it sought to bulk up in merchant processing and fast-growing tech niches, as its arch-rival Fiserv is doing with First Data.

And Worldpay isn’t even done melding its two predecessor companies together after their January 2018 merger: Cincinnati-based Vantiv Inc. as the acquirer and London-based Worldpay plc, with the combined entity taking the Worldpay name.

Payments analysts and researchers say there is probably more merger- and-acquisition activity to come.

“Do I think another one is coming in the future?” asks Jared Drieling, senior director of business intelligence at Omaha, Neb.-based payments consulting firm The Strawhecker Group. “Of course.”

The bosses at FIS and Worldpay, however, took pains during a March 18 conference call with analysts to stress the decision to merge was based on industrywide technology trends rather than on any need to react to the pending linkup of Fiserv, a keen rival of FIS, and First Data, a potent competitor to Worldpay.

“This is purely a strategic combination,” FIS chief executive Gary Norcross said. “We can’t speak to what other combinations are occurring in the industry. We want to make sure we have scale to compete not only now but in the future.”

Worldpay’s Charles Drucker ech-oed Norcross’s stress on the need for heft to develop and build out innovation, rather than a compulsion to counter competitors’ moves.

“This [deal] is all about an offensive deal and going to where the growth is,” he said during the call.

The FIS-Worldpay combo will create a processing behemoth that will compete globally across a sweeping range of payments businesses, including merchant acquiring, e-commerce, faster payments, and core processing.

Upon closing, which the companies expect in 2019’s second half, the combined entity will be based in Jacksonville, Fla., FIS’s headquarters city, and will boast more than $12 billion in revenue, based on 2018 numbers for both FIS and Worldpay. Norcross, FIS’s chairman, CEO, and president will serve in the same roles at the new FIS. Drucker, Worldpay’s executive chairman and CEO, will serve as executive vice chairman.

The deal comes as the payments industry strives to keep up with technological transformation in merchant acquiring while seeking new revenue streams in e-commerce, mobile payments, and real-time settlement, and from partnerships with software providers.

To be sure, if the deal clears shareholder and regulatory hurdles, it will create a powerhouse in a wide range of established and developing payments markets. FIS not only competes with Fiserv in core processing for banks but also, like Fiserv, operates a major debit card network, NYCE. It also handles card-issuing duties on behalf of bank clients and processes real-time payments in 19 countries. Worldpay brings strengths as a major acquiring processor, including in e-commerce.

“Back to the future as the industry stitches issuers and acquirers back together,” says Patricia Hewitt, principal at Savannah, Ga.-based PG Research & Advisory Services. “An important element of this is also having a global presence as geographic boundaries continue to blur.”

Even so, some observers were taken aback by the former Vantiv’s decision to sell, especially before it had fully digested its British partner, and FIS’s choice of target.

“We are surprised that the company is choosing to sell now ahead of realizing the full cost (about half left) and revenue synergies ($100 [million] run-rate exiting 2020) from the Vantiv/Worldpay combination. We would have expected other players in the space like [TSYS] to have been more strategically compelling for FIS given their card-issuer processing business,” said a research note issued by investment firm Keefe, Bruyette & Woods.

But the trend is for processors with big but slower-growing services for credit and debit card issuers to move into the faster-growing merchant-acquiring space, The Strawhecker Group’s Drieling says. “We’re kind of seeing the flip of these other [issuer] processors in terms of getting into the acquiring community,” says Drieling.

TSYS is still skewed more toward issuer processing, though it does have a big merchant-processing division, much of which originated with First National Bank of Omaha, Drieling says. Still, “they’re not in that same realm as a First Data” on the merchant side, he says.

Worldpay’s bigger presence in acquiring made it more of an attractive takeover target than TSYS, echoes Larry Berlin, a senior vice president at Chicago-based First Analysis Securities Corp. Thus, while some people think FIS’s acquisition of Worldpay is a surprise, “when you think about it, it’s not,” he tells Digital Transactions.

Besides TSYS, the roster of remaining sizable eligible buyers—or sellers—includes Global Payments Inc., U.S. Bancorp, which owns the big merchant acquirer Elavon Inc., and Jack Henry & Associates Inc.

Minneapolis-based U.S. Bancorp’s next move, if any, could be interesting. It is one of the very few big banks with a heavy direct investment in payment technology—JPMorgan Chase & Co. has pursued a similar strategy—and gets about a fifth of its revenues through payment services. Thus, it couldn’t be ruled out as a buyer seeking to enhance those services. At the same time, now might be the time to put a “for sale” sign on Elavon.

“I would not be surprised to see U.S. Bancorp shopping Elavon, as it is now a good market for selling acquirers,” says Aaron McPherson, vice president of research at Maynard, Mass.-based Mercator Advisory Group Inc., in an email. A U.S. Bancorp spokesperson declined comment.

The same could be said for Atlanta-based merchant processor Global Payments, which has been quiet since the Fiserv-First Data merger was announced. Global Payments has been a pioneer in the move by merchant processors into the independent software vendor market, having made several major acquisitions in a tech-oriented niche many processor executives covet.

And Monett, Mo.-based Jack Henry, which focuses mostly on small financial institutions, might find its business enhanced by the merger wave, should it remain independent.

“Small to medium-size issuers and merchants are weary of the large consolidations because they feel like they get lost in the fray,” Krista Tedder, director of payments at Pleasanton, Calif.-based Javelin Strategy & Research, says in an email. “Smaller processors, group service providers, and gateways could come away as the winners in the payment-world consolidation.”

—John Stewart, with additional reporting by Jim Daly and Kevin Woodward