Mergers & Acquisitions

M&A Corner

By Jim Bruene Posted on
Categories: Mergers & Acquisitions

Who's buying whom.

Ceridian Corp.’s Comdata Corp. unit is buying SASH Mgt. LLC for an unstated price. SASH does business as Gift Card Solutions. (Contact: Comdata Corp., 615-376-6986)

Coinstar Inc. is buying Travelex Money Transfer Ltd. for $27 million in cash. The privately held British firm TMT has a network of 17,000 agent locations in 138 countries; its revenues were about $5.8 million for the trailing twelve months ended December 31, 2005, with a negative EBITDA of approximately $10.4 million. Coinstar sells prepaid long-distance and wireless airtime; also, gift cards and prepaid debit cards. (Contact: Coinstar Inc., 425-943-8277)

HIMC Corp. signed a letter of intent to buy United States Financial Services Corp. through a stock swap. HIMC is mainly in Internet services; USFS owns Western Clearing Corp. LLC and ACH Processing Co. (Contact: HIMC Corp., 253-284-0320)

Online Resources Corp. is buying Princeton eCom Corp. for $180 million in cash, plus an “earnout” of up to $10 million, depending on future performance. Princeton eCom, which specializes in electronic bill payment and presentment, is privately owned, mainly by venture capitalist firms. Princeton chief executive Ronald W. Averett will head the company’s e-commerce business, including its card, credit, and real-time payments services. The deal includes financing from Tennenbaum Capital Partners LLC of $75 million in preferred stock convertible to common at a 25 percent premium to market, and $85 million in senior secured notes, giving Tennenbaum the equivalent of 4.6 million shares, or 14 percent of the company. Tennenbaum also gets a seat on the board. (Contact: Online Resources Corp., 703-653-2248)

S1 Corp. retained Friedman, Billings, Ramsey Group as its financial advisor to assist the board of directors in actively exploring the usual “strategic alternatives to maximize shareholder value.” S1 also hired law firm Hogan & Hartson LLP for further advice in the matter. The move follows settlement of some outstanding disputes with a shareholder group led by Ramius Capital Group, LLC, which gains a seat on the board. S1 insists “No assurance can be given that any transaction will be entered into or consummated as a result of this review.” (Contact: S1 Corp., 404-923-3500)

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Verifone Acquires Lipman—and the Future

By Jim Bruene Posted on
Categories: ATMs, Mergers & Acquisitions, Verifone Holdings Inc.

 

Verifone Holdings Inc. bought Israel’s Lipman Electronic Engineering Ltd. last week for a total of $793 million, giving Verifone pole position against its nearest rival in the point-of-sale terminal business, Hypercom Corp.

The deal, expected to close following regulatory and shareholder approvals in the fourth quarter, is engineered around a complex combination of cash and stock. It includes a special dividend that the companies would only say would likely exceed $23 million. An unspecified cap on the deal, based on undisclosed conditions, makes it almost impossible to fully value the transaction. Verifone is borrowing most of the money for the deal from an unidentified lending syndicate, and refinancing its existing debt, for a total of $540 million. 

The stock market liked the deal: Verifone’s shares spiked more than 10 percent on the news before trending back to the $30 range at which they had been trading before the news.

One good reason for that approval is the fact that Lipman’s business is strongest in relatively untapped markets like India, China, Eastern Europe and Brazil, all of which have relatively under-developed point-of-sale terminal markets. Lipman's product line is strong in advanced point-of-sale terminals, including contactless and Internet-protocol devices, and advanced ATMs.

“Arguably, the growth of this industry is in the emerging markets,” says Sam Ditzion, president of Tremont Capital Group. “Look at China. The percentage of consumers that have credit or debit cards today, versus five or ten years form now, is going to be absolutely extraordinary.”

That phenomenon is also in operation in the other markets Lipman has been active in, says Ditzion, and should greatly help Verifone’s future growth, assuming Verifone can preserve and extend Lipman’s footprint in those markets.

The deal will also reinforce Verifone’s bottom line. Verifone’s 2005 net income was $33.2 million on revenues of $485.3 million, and Lipman’s were $20 million on revenues of $235.4 million. Hypercom, by contrast, reported a 2005 net loss of $33.3 million on revenues of $245.2 million.

What the deal will not do is bring Verifone into the ranks of corporate point-of-sale vendors, a space currently dominated by IBM and NCR Corp. Aside from the sheer size disparity—NCR’s 2005 net income was $529 million on net revenues of $6 billion—Verifone and Lipman both sell to smaller operations than the large retail chains that typically use IBM and NCR systems.

This fact hasn’t diminished investor enthusiasm for Verifone. Since it went public last May, Verifone’s stock has risen over 300 percent; shares originally priced at $10.50 now trade in the $30 range.

The general approbation on Wall Street wasn’t universal, however; Standard & Poor’s, for instance, lowered its outlook on the announcement to negative from stable, mainly because of execution concerns. S&P left its credit rating of Verifone at BB-.

“It does seem that this acquisition cements Verifone’s lead [in its niche],” says Lucy Patricola, the S&P analyst who covers Verifone. ”Our concerns were really that they have yet to do an acquisition this substantial. From what I know, management has done very well running Verifone, so they certainly bring something to the table, but this acquisition is of a size and a scope in which they’re untested.”

The problem for Verifone is that it is already composed of several product lines from previous acquisitions, and it’s acquiring quite advanced systems from Lipman, including terminals in which Verifone has little experience manufacturing  or supporting.

That combination—unabsorbed product lines combined with new, advanced products—will be a challenge for Verifone executives, despite their good track record, and is an issue that’s tripped up acquisitions before.

This is especially true because acquisitions typically result in a certain exodus of top executives and important technical staff of the acquired company, stripping the buyer of the talent and internal knowledge it needs to hit the ground running with its new products. Considering the fact that so many of Lipman’s recent sales have been in relatively underdeveloped markets—markets that lack the sort of readily available, technical support infrastructure that’s a commonplace in the United States—those facts may result in unexpected problems for Verifone, in turn creating sudden expenditures.

“Those are some of our concerns,” says Patricola. “There’s also the concern that the increase in leverage might be worse than they’re projecting because of some issue [related to integration matters] that might lead them to spend more money than they’re planning to.” Integration costs, she adds, “are always the issue.” (Contacts: Tremont Capital Group, Sam Ditzion, 617-482-8866; Standard & Poor’s, Lucy Patricola, 212-438-3006)

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TRM Corp. Stumbles Badly after eFunds Deal

By Jim Bruene Posted on
Categories: ATMs, Mergers & Acquisitions

In Sept. 2004, TRM Corp. borrowed $150 million from a Bank of America syndicate and bought 17,200 ATMs from eFunds Corp. The deal made TRM, which already had 4,300 ATMs, one of the world’s biggest operators of ATMs in retail locations.

Today, after many stumbles, the main question on the minds of most observers is who, if anyone, will buy TRM.

“Things are very, very tough there right now, and in the next two to three months, we’ll see if they can save themselves,” says Sam Ditzion, president and ceo of Tremont Capital Group, which specializes in the ATM business.

Since the eFunds deal, TRM’s shares have fallen from a high of $26.00, to a low of $6.73. Sales roughly doubled, from $126 million in 2004 to $234 million in 2005, but sales discounts more than tripled—from $33 million to $109 million—and operating income slipped from $13.8 million to a loss of $5 million. Net income fell from $7.9 million in 2004, to a 2005 loss of $8.9 million.

Last September, the company said it was in default of the Bank of America loan, and gained forbearance. Last month, the forbearance ran out and it was still in default. Although the bank gave TRM more time to straighten things out, or refinance, the default may affect TRM’s NASDAQ listing. Meanwhile, Allen & Co. has been hired to pursue the usual strategic options, and CEO Kenneth L. Tepper and COO Thomas W. Mann both left the company, which was late filing its 2005 10-K. And two new acquisitions were cancelled, costing TRM $5.2 million in break-up fees alone.

This state of affairs came to pass for a number of reasons, some TRM’s fault and some not.

“The eFunds transaction has proven to be more of a challenge to integrate than initially anticipated. The industry in general has become a more challenging environment just in terms of transaction volumes being lower and costs being higher, and there’s been some bad luck here and there. Collectively, it’s a problem,” says Ditzion.

Some of that bad luck could have been minimized, and some not. The British pound rose against the U.S. dollar last year, costing the company $72,000. The loss would have been greater, but it was cushioned by the Canadian dollar’s fall against the U.S. dollar. Unlike most companies with international operations, TRM doesn’t hedge its currency exposures, and doesn’t explain why. Eighteen percent of TRM’s ATM portfolio is in the United Kingdom, but it accounts for 23 percent of company sales. TRM’s Canadian ATM portfolio accounts for 8 percent of its machines, and 10 percent of its sales.

The company’s U.K. results were also hurt by two events beyond its control: The government required all ATM networks to be upgraded to the expensive triple-DES encryption standard (the United States only requires double-DES); and thieves in the United Kingdom began stealing ATMs outright by picking them up and driving off with them. Those thefts have declined, but are still occurring. TRM, which wasn’t the only ATM operator affected—it’s a regular crime wave, by most accounts—estimates that the thefts cost it $2.2 million, including $1.3 million in unreimbursed losses. Those losses were probably magnified by a company decision made earlier in the year to cut back its ATM crime insurance to cover only catastrophic losses because of increased premiums and deductibles.

But most of the company’s problems came from the eFunds deal. According to TRM’s tardy 10-K, and the analyst’s presentation that accompanied its release, buying that portfolio turned out to be a disaster. For one thing, eFunds’ performance, under the terms of a five-year management contract that it got out of the deal, was disappointing at best. Even worse, the portfolio itself underperformed the rest of TRM’s locations, both in terms of traffic and amounts withdrawn.

These problems point to important management lapses, and especially to poor due diligence. At the time of the deal, TRM said it expected to improve the portfolio’s performance by weeding out underperforming locations, raising fees 18 percent, and reducing processing fees by 50 percent, resulting in a 30 percent overall cost reduction (see Electronic Payments Week, Sept. 28, 2004).

None of this came to pass, aside from reducing the number of locations from a total of 21,000 to 19,930. Withdrawal transactions, for instance, grew from 26.7 million to 77.3 million, but average withdrawals per machine fell from 359 per month to 323, and net transaction-based sales per transaction fell from $1.76 to $0.97. This was aggravated by disappointing results in TRM’s other business line, in-store photocopy machines, which experienced falling volume of 20 percent for 2005 over 2004, to 485 million copies from 609 million copies. The company says this is an established trend.

As for the goal to cut processing fees by 50 percent, there’s no way to tell from the recent 10-K since TRM doesn’t break them out separately. Much of those savings were expected to come from the five-year management contract with eFunds, under which that company agreed to manage the ATM network, replacing a patchwork of smaller third-party providers.

But comments at the analyst’s presentation after persistent questioning on the subject—TRM executives wouldn’t consent to be interviewed—indicated that there have been substantial problems with the eFunds contract under which eFunds agreed to manage and enforce the contracts with the individual merchants operating the TRM locations. TRM’s new interim president and CEO Jeffrey F. Brotman said they’d been working closely with eFunds to correct problems, and that “…things are better now,” a sure indication of a disappointing experience, at best, for TRM.

Whatever those problems have been, they apparently didn’t go so far as to have spawned a lawsuit—the two companies are still working together—but it apparently did nothing to enhance value for TRM’s shareholders, 46 percent of whom are 47 institutions.

And a sale might not do the trick for them, either. Capital IQ estimates TRM’s enterprise value at $312 million, while the entire market capitalization is only about $95 million, debt is $220 million, and of a 10.9 million share float, there were 2.58 million shares short as of March 10—almost 21 percent. Coming back from conditions like that will be tough, at best, and those conditions, says Ditzion, may not exactly encourage private equity investors to step into the breach.

“Private equity firms are unlikely to be interested in buying companies that are not profitable or unlikely to be turned around, or hopeless,” he says. “Overall, they’ve done a pretty good job, but things have fallen through the cracks, and that hurts. These deals (like eFunds) are all done on very specific return on investment, and if a couple of things fall through the cracks, you can lose out.”

eFunds, meanwhile, is doing pretty well. According to its last 10-K, it had 2005 revenues of $502 million, only $112 million in debt, and 11.8 percent quarterly earnings growth. Since last June, its shares have risen from $17.10, to $25.84 at last Friday’s close. (Contact: Tremont Capital Group, Sam Ditzion, 617-482-8866; TRM Corp., 503-257-8766)

 

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Two New Deals from First Data and TNS Inc.

By Jim Bruene Posted on
Categories: Mergers & Acquisitions

Two new deals, from First Data and TNS Inc.

First Data Corp.’s TeleCheck Services Inc. unit has bought ClearCheck Inc., which sells and services return check management systems, for an undisclosed sum. The ClearCheck business will become part of First Data’s Commercial Services division. (Contact: First Data, 713-331-7359)

TNS Inc. was tendered a non-binding buy-out proposal on March 13, 2006, from a management group led by Chairman and Chief Executive John J. McDonnell Jr. at $22 a share in cash, or about $527 million. Capital IQ rates TNS’s enterprise value at $579 million. The company has formed a Special Committee of its Board of Directors to negotiate the deal, and hired Deutsche Bank Securities Inc. as its financial advisor. A class action suit was filed on March 13 against TNS and its directors trying to enjoin the deal on grounds that TNS’s directors violated their fiduciary duties in the deal. TNS operates computer networks, including ATM networks. (Contact: TNS Inc., 703-453-8509)

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Capital One Buys North Fork Bank

By Jim Bruene Posted on
Categories: Capital One Financial Corp., Card Acquiring, Card Issuing, Mergers & Acquisitions

Capital One Financial Corp. will be one of the nation’s 10 biggest banks based on deposits and managed loans when it buys Long Island’s $57.6 billion North Fork Bancorporation for $14.6 billion in cash and stock.

That Capital One has turned itself into a national depository institution with branches and checking accounts is yet another indication, if one is needed, that credit cards are no longer a stand-alone business.

The deal gives Capital One a toehold in the lucrative New York market, and apparent expansion prospects there. It also builds on last year’s $5.3 billion acquisition of Hibernia Bank, which closed in mid-November. According to Capital One’s 10-K, Hibernia experienced what it called substantial growth in deposits after Hurricane Katrina.

Unremarked by media coverage was the irony that a business that’s still very profitable apparently feels it needs a cheap source of funds, and customers to sell to, in order to weather the many challenges now threatening its core competency.

Unremarked by the media, perhaps, but not by the stock market, which didn’t respond well to the news: Capital One stock, which closed on Friday, March 10, at about $90, closed on Monday March 13, the day of the announcement, at $83.10, and at $82 the next day. Morgan Stanley’s Kenneth Posner estimated in an investment advisory that the deal was neutral to Capital One earnings, and allowed Capital One modest synergies from the deal, worth $400 million in strategic value at best. He recommended buying on Monday if shares fell.

Standard & Poor’s said in a note that it felt the deal was priced fairly at about 15 times their 2006 earnings estimate for North Fork of $2.08 per share, and a price/book ratio of 1.6 times earnings. “We thought the recent weakness (in North Fork stock, prompted by concerns about its deep exposure to residential mortgages) presented investors with an attractive entry point. Apparently, Capital One arrived at the same conclusion,” wrote the note’s authors, Jason Seo and Mark Hebeka.

At least Capital One was acting out of relative strength: Its 2005 net income was $18 billion, up from $15.4 billion in 2004. But the company clearly felt it was wise, at a minimum, to continue diversifying away from credit cards. Capital One’s year-end credit card balances were $19.7 billion, compared with $20.5 billion in 2004, and average loan balances fell in 2005 to $12.07 billion, compared with 2004’s $12.24 billion. Interchange revenues grew to $514 million, compared with 2004’s $475 million. On a managed basis, Capital One reported $105.5 billion in outstanding loans, compared with $79.8 billion in 2004. Hibernia’s results were not included in Capital One’s 2005 results.

The company was clearly acting defensively, and recognizing that future growth in the credit card sector will be nothing like what it was only a few years ago—even for a company as well managed as Capital One—and that it won’t be again, anytime soon.

“(The deal) says a lot about their future as an entity,” says Michael Auriemma, president of Auriemma Consulting. “I’m not sure I’d have predicted they’d be buying banks, but there’s a strong realization that credit cards belong in an institution with retail customers—the amount of information- and data-sharing synergies by having both is phenomenal, and credit cards are challenged in terms of growth of new acquisitions these days.”

Capital One apparently has no bone to pick on that score. In its recent 10-K, it said that “The competitive environment is currently intense for credit card products. Industry mail volume has increased substantially in recent years, resulting in declines in response rates to the Company’s new customer solicitations over time. Additionally, the increase in other consumer loan products, such as home equity loans, puts pressure on growth throughout the credit card industry. These competitive pressures remain significant as a result of, among other things, increasing consolidation within the industry.”

Auriemma thinks, though, that Capital One can continue to be highly successful in the future. “There’s a lot of room to make a lot of money, and to grow your credit card business without growing new accounts,” he says. This, he says, includes building bigger balances, increasing consumer spending, and using the data from the payments stream to cross-sell other products to credit card customers. “This (deal) is less about new customer acquisition and more about managing existing customers, looking for a funding source, and diversifying revenues.”

By remaining on the offensive, Capital One apparently also hopes to keep Wall Street happy, and itself independent. Aside from Advanta Bank Corp., which reported 2005 net income from continuing operations of $116.7 million, America’s other monoline banks, once wildly profitable businesses, are gone with the wind. And Capital One itself isn’t entirely safe from acquisition; its float is only $25 billion, so it could clearly be bought by a large bank. Last year, Bank of America bought MBNA for about $35 billion in cash and stock, and other large banks—Wachovia Corp., for one—have said they’re interested in getting back into the credit card business.

North Fork reported 2005 net income of $948 million on revenues of $3.48 billion, and more than doubled its asset base after two 2004 acquisitions—Greenpoint Financial and The Trust Company of New Jersey. It has 360 branches in the New York area, including in northern New Jersey, and, according to Standard & Poor’s, it has about 4.8 percent of the area’s deposits. When the deal, subject to regulatory and shareholder approvals, closes in the fourth quarter, its top executives stand to get a payout of about $288 million, including chief executive John Kanas, who could receive as much as $185 million. Kanas joined the bank in 1971 and became president and chief executive in 1977. (Contact: Auriemma Consulting Inc., Michael Auriemma, 516-333-4800; Capital One Bank, 804-284-5800; North Fork Bank, 631-531-2058)

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M&A Finance Corner

By Jim Bruene Posted on
Categories: Mergers & Acquisitions

This week’s dealing and wheeling.

JP Morgan Chase & Co. is buying Kohl’s Corp.’s private label credit card accounts and associated outstanding balances for an expected $1.5 billion in cash. The exact price will equal the receivables balances at the closing date. Kohl’s will continue handling customer service, advertising, and marketing for the portfolio, and gets an unstated percentage of future payments. All Kohl’s credit card employees remain employees of Kohl’s. The retailer, which operates 741 stores in 41 states, expects to open about 500 stores over the next five years; it hopes to be operating more than 1,200 stores by the end of 2010. (Contact: JP Morgan Chase & Co., 212-270-7013; Kohl’s Corp., 262-703-1893)

E-monee.com Inc. has merged with Coffaro Family Products Inc. and will be operating under the E-monee name. Terms were not disclosed. E-monee,which had been privately held, now trades on the Pink Sheets under the Coffaro Family Products ticker symbol, CFRF. It has a mobile banking platform aimed at the unbanked that E-monee calls its Global Electronic Treasury System. For the 2004 fiscal year, E-monee reported $1.6 million in assets and a net loss of ($140,526). The merged company’s stock closed on March 17 at $0.32. (Contact: E-monee.com Inc., 954-229-3011)

Obopay says it raised $10 million in first-round funding from investors that include Redpoint Ventures, ONSET Ventures, and New York-based Richmond Management. Obopay has a mobile payments platform that lets subscribers get, send and spend money from their cell phones. (Contact: Obopay, 866-262-7373)

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Expect M&A to Stir the Pot in 2006

By Jim Bruene Posted on
Categories: Fidelity National Financial, First Data, JP Morgan Chase, Mellon Financial Corp., Mergers & Acquisitions, Metavante, Pay By Touch

Dust off your resumes. Companies large and small will be embracing or fending off suitors this year, and since merger-and-acquisition (M&A)activity always means staff consolidation—also known as layoffs—some of the biggest beneficiaries of such deals will be outplacement firms and headhunters.

There’s plenty of money around to make this happen. Private equity firms have identified payments as an area ripe for their attentions, in part because the sector offers their investors predictable and recurring revenues, but also because it has high organic growth rates and, aside from a handful of giants, many small firms that can be picked up cheaply.

“Private equity companies pulled in something like $111 billion for this year, and they’ve got to use it somewhere,” says Richard X. Bove, a banking analyst with Punk Ziegle & Co. “They have to buy a lot of things, and a lot of big things, and they have to put that money to work.”

Another reason for accelerating M&A activity: Payments is a commodity business so competitive that almost the only way to grow is to buy companies for their customers. And larger, established companies need to grow, or suffer the wrath of Wall Street. That combination will prove deadly this year to attractive targets.

When they do put that money to work, expect long-established company names to disappear, along with many of their jobs. “They have to add value, and add value quickly, and since they don’t know how to build businesses, they strip them, so there will be a lot of pieces (of acquired businesses) available if they buy them,” says Bove.

There were 113 closed acquisitions of various sizes last year, according to Mercator Advisory Group, and while Mercator has no estimate of the dollar value of those deals, it expects the pace of this year’s M&A deals to be brisk in the payments space—especially those originating from private equity funds, which find such deals relatively easy to sell to their investors.

“They have a hard time finding businesses that have recurring and predictable revenues going forward, and payments companies are like that, so even if the growth rate (of individual companies) isn’t what it used to be because of the maturation of the industry, private equity firms are interested,” says Evren Bayri, who tracks deals as director for the company’s credit advisory service.

Predictable, recurring revenues play a useful role in smoothing investment results, an important quality for organizations like pension funds, which need reliable revenues to fulfill obligations to their pensioners. That smoothing effect is widely considered to be one reason Morgan Stanley decided to hold on to, and grow, its Discover Financial Co. unit, even if its performance trails its competitors.

This year’s deals may be largely emerging from private equity firms, but that’s hardly to say all those deals will be small; last year, a consortium of private equity groups bought IT giant SunGard for a reported $10.8 billion. Also last year, Texas Pacific Group and Thomas H. Lee Partners, both private equity investors, invested $500 million in Fidelity National Financial Inc.’s Fidelity Information Services unit, following a failed attempt to raise several billion dollars intended to buy the whole company. Later last year, Fidelity merged the unit with Certegy, effectively spinning off Information Services and, in what was widely viewed as a side-benefit, diluting the holdings of Texas Pacific and Lee, while giving them an exit if they wanted one.

Private equity-financed deals aside, expect some really big, traditional corporate M&A deals to make headlines this year, says Bove. Think J.P. Morgan Chase & Co. buying First Data Corp., he says, or Marshall & Ilsley Corp. spinning off Metavante.

First Data, thinks Bove, may sell itself off piece by piece and distribute the proceeds to its shareholders. There’s some indication this may occur: On March 7, First Data Inc. sold its BidPay.com unit to CyberSource for $1.8 million in cash—an admittedly tiny deal, but one that may promise more to come. But in his opinion, it’s more likely that Morgan/Chase will buy it.

“I’m convinced that Heidi Miller is going to do the next major acquisition—she took control of that operating division to prove she could run a company, and she’s proved it—and First Data would be right up her alley” because First Data would fit into Chase’s plans to dominate the payment processing space, says Bove.  Miller is a Morgan/Chase executive vice president, and ceo of its enormous Treasury & Securities Services unit. First Data and Morgan/Chase say they don’t comment on market speculation.

As for Metavante: Bove has long thought that Marshall & Ilsley needs to spin off its payments unit in order to realize its value. “M&I has reached the point where they can’t get the overall holding company stock to go higher, and I think the only rational solution is to spin out Metavante, which they tried to do before,” he says. Marshall & Ilsley says it has no plans to spin off the unit.

One other possibility for a big deal this year? Bove expects Mellon Financial Corp. to beef up its large and well-regarded payments business this year through acquisitions.
“I think Bob Kelly (Mellon’s new CEO) was put in place for the purpose of expanding that business through acquisitions,” says Bove. Mellon denies this, saying that “Bob Kelly’s focus at Mellon is on organic growth.”

Such headlines will be flashy if they appear, but the most disruptive force on day-to-day life in the payments space is more likely to be smaller, less ostentatious acquisitions by private equity firms or the companies they invest in, intended by those shops as the kernels of new businesses, built around newer technology and innovative business models.

“The whole idea is to make a small-margin business into a wide-margin business,” says Andrew Dresner of Mercer Oliver Wyman. “What (acquirers) are looking for is a scalable model, where if you add volume, you increase your margins.”

Payments has those characteristics, says Dresner, because the underlying payments sectors have high growth rates in and of themselves—whether individual companies are matching that growth or not—and because the areas with the highest growth rates are still the domain of relatively small, innovative companies.

“That offers opportunities to do rollups,” he says. “You buy a pretty good company, and use it as an acquisition engine to pick off a lot of small companies. So you turn a small company in a high-growth industry into a big company in a high-growth industry; they’re not looking at these companies for what they have on the table today.”

One such suspect: Pay By Touch, which has attracted $320 million in new investment capital since last September—much from private equity funds—for its biometrics-based payments model. The company says it’s using that money to, among other things, grow by buying customers.

Last year, for instance, Pay By Touch bought 120,000 merchants when it acquired the assets of CardSystems Solutions late last year for $47 million in cash and stock. And in January, it closed on an $82 million acquisition of Bio-Pay, a former competitor with more than 2 million customers.

Companies like Pay by Touch may be the beneficiaries of this phenomenon, but the companies they buy are not. “If it’s a vendor play, and they’re buying a smaller company with similar technology for its customer base, I certainly see people losing jobs,” says Bayri. Even in the case of a real merger, with both parties bringing something to the table, he adds, “You see engineering jobs being cut as they consolidate the R&D staff; then they beef up the sales staff.”

The companies doing the buying—or financing it—really shouldn’t be blamed for any job losses, though, even if they are the agents of it. It’s more in the nature of business:  The private equity companies, for instance, are under pressure to perform financially, so following an acquisition, they typically begin by claiming they are returning the acquired firm to its core competencies.

As a practical matter, however, they begin laying people off, avoiding new investment in areas like research and development, and selling off subsidiaries. “They strip down the company, eliminate the costs, and make it look profitable in the short term,” says Mercator’s Bayri.

Such activity isn’t common yet, but he expects it will, if more private equity firms enter the fray; in the last year, Bayri says most M&A activity was “mostly bigger players buying smaller players, or vendors buying specific products that target specific segments.” Likely sectors: Mobile payments, health care payments, micropayments, stored-value cards, and e-commerce generally, says Dresner.

When the dust settles, the result will be mushrooming companies apparently coming out of nowhere to dominate their niche and eventually get very big. “The forces for consolidation in payments are enormous,” says Dresner. “It’s a scale business with a heavy technology business, so they all go down that path, be it merchant acquiring or PIN debit or what have you.” (Contact: Punk, Ziegel & Co., Richard Bove, 727-545-0505; Mercator Advisory Group, Evren Bayri, 781-419-1700; Mercer Oliver & Wyman, Andrew Dresner, 646-364-8444)

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Western Union Spin Off May Do Little for First Data

By Jim Bruene Posted on
Categories: Chase Paymentech Solutions, First Capital, First Data, JP Morgan Chase, MBNA, Mergers & Acquisitions, MoneyGram, Payment Cards, Strategic Planning, Synovus, TSYS, Western Union

Last week’s news that First Data Corp. will spin off its Western Union operations to First Data shareholders and create a company worth an estimated $20 billion is probably good news for Western Union. Noting that the parent company will be keeping its card processing, card services, and international business lines, observers were asking what had otherwise changed.

The answer: Nothing. “The bottom line for me is that this doesn’t change the realities, which are that even though they’re going to reconstitute what First Data will be, it doesn’t change the facts that Western Union, while it’s a good business, is facing increasing competition around the world, that the card business is struggling mightily, and that merchant processing is a commoditized business,” says Scott Kessler, who follows First Data for Standard & Poor’s.

Continue reading “Western Union Spin Off May Do Little for First Data” →

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MBNA Might Acquire Egg

By Jim Bruene Posted on
Categories: Credit/Debit Cards, ING Direct, MBNA, Mergers & Acquisitions

MBNA Egg.com?

The Wall Street Journal today reported that MBNA was considering a purchase of Egg, the UK-based Internet bank and credit card issuer. While the primary purpose of the acquisition would be to pick up the bank's 2.8 million card accounts, MBNA would likely consider expanding the Egg.com Internet banking franchise into the United States.

We think the U.S. market is ready for another innovative Internet banking brand. Look at what ING Direct (USA) has accomplished in under four years: built a successful franchise with more than one million accounts and $16 billion in deposits (year-end 2003).

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