What's next for merging titans Fiserv, First Data?

Back in 2007, when Kohlberg Kravis Roberts & Co. agreed to pay $29 billion for First Data Corp., the news sent shock waves throughout the payments industry. Many experts feared the private equity firm would have a detrimental effect on one of the nation’s largest acquirers and thereby roil the industry. The news released Jan. 16, 2019, that Fiserv agreed to acquire First Data was received with much more calm. This is partly because the industry’s landscape has transformed significantly over the years, and partly because this is a merger of enterprises with compatible strengths that could benefit the clients of both companies.

“Through this transformative combination, we expect to redefine the manner in which people and institutions move money and information,” said Jeffery Yabuki, President and CEO of Fiserv. “We expect this combination to catalyze and support an enhanced value proposition for our collective clients and their customers.”

Michael Tomko, CardX COO, concurred, stating, "As a solution provider, some of the most significant bottlenecks we face in serving clients, especially enterprise clients, are the capabilities offered by our processing partners. If this acquisition gives our industry stronger options for integrations between processors and payment technologies like CardX, it will open up new and exciting opportunities for innovation in the market."

First Data Chairman and CEO Frank Bisignano added, “Our goal at First Data has always been to provide our clients with the most comprehensive suite of innovative, highly-differentiated solutions and services, and I am excited by the significant value that the combination with Fiserv creates for all stakeholders.”

Debt service an issue

However, the merger will not be challenge free. Adam Atlas noted that debt servicing could have been a driving factor. “My understanding is that prior to this transaction, First Data had very substantial debt which is becoming increasingly costly to service in a market with increasing interest rates. The merger, therefore, might be to achieve certain efficiencies between these two titans of processing.”

Atlas also pointed out that despite efficiencies that may be achieved, Fiserv and First Data might face substantial challenges from much smaller, more nimble payments providers. “The commoditization of processing platforms has, in a way, leveled the playing field for smaller startups to challenge large incumbents,” he said. “In a world where almost everyone uses AWS servers from Amazon, the upstart is at not much of a disadvantage compared to old incumbents when pitching large merchants or banks on processing services.”

Atlas added that he doesn’t expect much to change for ISOs. “In recent years, First Data has sharpened its pencil vis-a-vis ISOs, and perhaps that culture will remain in place in the merged entity. Fiserv has excellent systems that might allow ISOs to broaden their product offerings to merchants. Hopefully, First Data's debt will be lightened in the newly merged entity and that lighter burden will be passed on to ISOs.”

Will the ISO channel survive?

When asked for his perspective on the merger, Steve Norell, director of sales at US Merchant Services Inc., said, "My first thought is that KKR is drinking champagne now that they have dumped this albatross, which they over paid for, had to refinance multiple times, more than likely never made any real money, and sold for less than they paid."

Norell spoke of KKR's prior involvement with Safeway and other companies, stating, "Their model was always do an LBO, break it into parts and sell them, since they are worth more than the whole." He added that while that did not happen with First Data, he believes the partnership "never really worked."

So what happens next for First Data? "Usually, the buyer wastes little time in raising prices and trimming fat," Norell noted. "I see no reason why that won’t happen here. The real question is what will the new owner want to do with the ISO channel? I am sure that they will come out and say they are more committed than ever to the channel but, in my opinion, they will take the Paymentech route and eliminate it. They really don’t need it."

Under the terms of the agreement, First Data shareholders will receive a fixed exchange ratio of 0.303 Fiserv shares for each share of First Data common stock they own, for an equity value of $22 billion.

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