The multibillion-dollar merger/acquisition between Fiserv Inc. and First Data Corp. may have caught many by surprise, but it makes perfect sense.
As the financial-institution market in the United States continues to shrink, it forces the consolidation of core-banking solutions and the processors that service those banks. Therefore, Fiserv’s move is smart and creates compelling strategic and financial benefits for the companies, including:
1. Differentiated Financial Services Platform
The merger is expected to create additional value for account processing clients and take those relationships deeper. Since they plan to link their merchant and cash management capabilities, there are plans to create new offerings while providing First Data’s Clover cloud-based platforms for small and medium-sized businesses.
2. Better Payment Capabilities
The merger creates a varied, end-to-end payments platform from issuance to acceptance. By focusing on innovation, the partnership will provide additional payment options to bill collectors and merchants, and therefore, meeting the demands from their customers.
3. Complementary Distribution Channels and Products
Customers of Fiserv and First will get more value by having access to more solutions. Fiserv’s clients will benefit from First Data’s Clover platform. On the other side, First Data will benefit from Fiserv’s biller solutions.
4. Greater revenue growth potential
In just a five-year period, the merger is expected to generate at least $500 million in revenue synergies. Incremental revenue growth is expected to come from a focus on delivering additional client value in areas, such as:
- Bank merchant services
- Credit processing
- Additional biller services
- Network innovation
5. Strong Adjusted Earnings Per Share Accretion
In the first full year following close, the merger is project to be accretive to adjusted EPS by more than 20 percent. Together, it anticipates accretion of more than 40 percent to adjusted EPS at the full cost of the synergy run-rate.
6. Significant Cash Flow Generation
The combined company expects to generate significant free cash flow exceeding $4 billion in the third year following close, including synergies. Fiserv intends to deploy its cash flow through the continuation of its proven and disciplined capital allocation strategy, and remains committed to retaining its investment grade debt ratings.
7. Substantial Cost Savings
Due to the elimination of duplicative corporate structures, streamlined technology infrastructure, increased operational efficiencies, process improvements, and footprint optimization, the deal is expected to generate about $900 million of run-rate cost synergy savings in as little as five years.
8. A Rock-Solid Financial Position
Fiserv plans to refinance First Data’s appoximately $17 billion in debt when the deal closes. Within 24 months after the deal closes, Fiserv expects to use its strong free cash flow to decrease the company’s debt to adjusted EBITDA ratio to a level generally in line.
In a Nutshell
This merger puts Fiserv in a strong position in the payments landscape of the global market. First Data also furnishes Fiserv with a cache of assets, which allows the company to meet the needs of fintech-enabled financial services market in the future.
Though this merger was a surprise in the sector, it likely was long in the works. The buyout of Worldpay Inc. by Fidelity National Information Services Inc. (FIS) was likely a defensive move made in response the Fiserv-First Data deal.
Since FIS has a presence in more than 130 countries, The deal with allow Worldpay to speed ahead with its global international business. Also, this will launch FIS into the much higher growth market of merchant acquiring.
As Fiserv’s deal to buy First Data for $21.79 billion settles, those in the fintech industry believe others in the sector will make similar moves to stay competitive.