The appearance of two massive acquisitions in the financial technology space within the past few months has others in the industry asking how they will respond.
Fidelity National Information Services Inc.'s $35.34 billion purchase of Worldpay Inc. is the industry's largest-ever deal, while Fiserv Inc.'s $21.79 billion acquisition of First Data Corp. now ranks third in the record book. The deals continue a trend of consolidation in the payments space and add even more pressure on companies to link up. The industry is maturing, with more than a dozen names holding market caps above $20 billion.
"If you're talking about a time horizon of the next couple of years, at this point I think it's more likely than not we will see another" fintech megamerger, Wolfe Research analyst Darrin Peller said.
The analyst specifically expects more M&A among the large merchant acquirers, or companies that process payments for merchants. In light of the large deals, smaller players are forced to "at least consider" combining to take advantage of potential operating synergies that would give them enough scale to compete with Fiserv and Fidelity National, commonly referred to as FIS, Peller said in an interview.
At what could be a $69 billion market cap, the combined FIS-Worldpay would trail only Visa Inc., Mastercard Inc., PayPal Holdings Inc. and American Express Co. in size. Meanwhile, a combined Fiserv-First Data would be the eighth-largest fintech in the world, according to an S&P Global Market Intelligence analysis.
The payments landscape is now driven by the growth in both e-commerce and omnichannel commerce, which describes a sales approach that integrates in-store and online shopping experiences, MoffettNathanson analyst Lisa Ellis said in an interview. The industry, particularly the merchant acquiring sector, is consolidating because companies need global scale to compete.
Although Ellis does not see another obvious combination in the near future, she noted several companies that are likely now on the lookout for new opportunities. Total System Services Inc. and Jack Henry & Associates Inc. are the remaining two large issuer processors, or companies that process payments for consumer banks. And Chase Paymentech Solutions LLC and Global Payments Inc., the next-largest merchant acquirers, will come under more pressure due to the Fiserv-First Data and FIS-Worldpay deals, Ellis said.
There are two approaches payments companies can take to compete with the new heavyweights, Jefferies analyst Michael Del Grosso said: scale versus software differentiation.
The rush for scale satisfies a growing interest in providing an end-to-end product solution. Fiserv's acquisition of First Data, for example, allows it to not only process payments on the banking side but also acquire payments on the merchant side, giving it control of the entire process. FIS and Worldpay have the same goal in mind.
On the other end of the spectrum is Global Payments, which has a "unique strategy" of direct software ownership, Del Grosso said in an interview. He is watching to see what Global Payments and PayPal do next, since executives from both companies have expressed interest in doing more M&A.
Global Payments CFO Cameron Bready recently said his company is looking to pursue M&A that will augment one of three areas of growth: software-drive payments strategy, e-commerce and omnichannel commerce, and exposure to fast-growth markets. The executive said Global Payments wants to buy assets in markets where there is a "strong nexus between payments and software.”
Meanwhile, PayPal recently invested $750 million in Argentina's e-commerce powerhouse MercadoLibre Inc. PayPal executives said previously that they intend to pursue several deals valued between $1 billion and $3 billion in each of the next several years.
Like Global Payments, Worldpay and FIS had both previously focused on smaller acquisitions. Worldpay has had many tuck-in deals in recent years, focusing on building out its payment and data processing capabilities, S&P Global Market Intelligence data shows. But it, too, has contributed to the wave of massive deals: Its predecessor company, Vantiv Inc., closed its acquisition of Worldpay Group PLC and took on the latter's name and branding in early 2018.
FIS had also previously focused on smaller acquisitions to beef up its software offerings. Its largest deal before Worldpay was a $5.20 billion purchase of investments and capital markets technology company SunGard, now called FIS SG LLC, which closed in 2015.
No companies are actively pursuing both scale and differentiation, Del Grosso said, but that does not mean the two paths cannot both be successful. Still, Wolfe Research's Peller said scale is more important now than it ever has been before.
"You have to ramp up your scale as fast as you can to be as competitive as possible both from a [global] reach standpoint and a pricing standpoint," he said. "Now is the time to capture as much market share in some of the fast-growth areas like e-commerce or you're going to miss it to someone else."