10 weeks after its rival Fiserv bought First Data for $22bn, US-based financial technology firm FIS has splashed $43bn to acquire WorldPay. Deals like these could become the new normal for payments industry, as financial giants aim to cope with greater competition and new regulations by snapping up companies to boost their market presence.
“Payments is a scale and volume game. The larger the scale and volume, the bigger your slice of the pie [and] the more you control variables like rate fluctuation and exchange fees,” says Mike Massaro, CEO of Flywire. “The cross-border payments market alone is roughly a $7trn market opportunity, so there is room for multiple players.”
Payment giants are threatened by growing competition, Massaro adds, and are on the acquisition trail. “They are looking to fill in the puzzle with the pieces they lack to compete in a new global, open and data-centric landscape.”
FIS announced its plans to acquire WorldPay last week and will see the firm name seven directors to a new 12-member board. FIS CEO and chairman of the board, Gary Norcross will remain in his position, while WorldPay’s Charles Drucker will join the combined firm as executive vice-chairman.
“This is a bold and exciting milestone for both our individual companies and the wider industry,” said John Crawford, vice president of finance at FIS. “Above all else, this merger is centred around planning for the future and connecting merchants and consumers to financial institutions globally.
“It is always difficult to comment on what industry players might do, but mergers and acquisitions have always played an important part in FIS’s strategy, and will continue to do so as we evolve. Our merger is a fantastic example of where consolidation works to the advantage of our clients, enabling them to grow more effectively. Scale is very important in the payments industry where the need to have secure, global capabilities is important.”
WorldPay shareholders will be entitled to receive 0.9287 FIS shares and $11 in cash for each share of WorldPay. After the deal closes FIS shareholders will own approximately 53% and WorldPay shareholders will own approximately 47% of the combined company. The agreement is the second time that WorldPay has been acquired for a multi-billion dollar sum, after its $10bn takeover by Vantiv in 2018.
Valli Ardalan, vice president at Earthport, itself currently under a £200m acquisition bid from Visa, says that the merger “isn’t hugely surprising” considering that the payments sector is “the hot place to be right now”. According to Ardalan, “we’re going to see more consolidation. A lot of larger businesses in the sector are looking at how it might be easier to partner than to build the capabilities themselves.
Following the puck
On an investor call last week James Woodall, FIS chief financial officer, said the deal would see a revenue increase from 4% to between 6% and 9% by 2022, alongside $400m of “cost synergies” and an annual revenue of $12.3bn rising to $15bn within three years. After the deal is finalised in the second half of 2019, the company will continue under the FIS name, with its global headquarters remaining in Jacksonville, Florida.
According to WorldPay figures, the payments firm processes 40bn transactions a year across 146 countries and in 126 currencies. Originally operated by Royal Bank of Scotland, WorldPay was sold to comply with European Commission conditions over state aid following the global financial crisis.
FIS has a history of large-scale mergers and acquisitions (M&A). It bought Sungard for $9.1bn in August 2015 to gain a foothold in the treasury and capital markets space, refinancing the ailing firm’s $4.1bn debt. In 2009 the vendor spent $2.94bn on Metavante Systems.
“As we have discussed over the years, M&A has been and will continue to be a key component of our overall strategy,” said FIS CEO Norcross on the investor call. “We have never wavered on this strategy, as we aim to create the broadest set of solutions in the financial services industry. Given the massive change that is occurring throughout the industry, driven by modernisation we’re extremely pleased in FIS’s combination with WorldPay.”
The deal is “only about offence,” according to WorldPay’s Drucker. He refused to comment on the $38bn acquisition of First Data by rivals Fiserv in January. Norcross would only say that FIS wants “to make sure we have scale to compete not only now but in the future.”
Drucker added: “[in ice hockey] you head towards where the puck is going. We thought we had an advantage as WorldPay – and we do have that advantage – but now it can be accelerated by an FIS toolbox which will allow us to take advantage of the growth in the ecommerce sector. It’s all about offence, that’s why we went for it.”
“The industry must ask itself a question,” adds Massaro. “Regulators have spent years challenging the dominance of the big payment firms from interchange fee limits to legislation like PSD2 that threatens to shift power away from card networks and boost competition. If the payment giants acquire the pieces of the puzzle to become dominant once more, has the industry taken a retrograde step?”
Source: https://www.paymenteye.com/2019/03/25/fis-worldpay-merger-to-become-the-new-norm-for-payments/