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International expansion next for Global Payments after $22B merger

A $22.14 billion deal is not stopping one of the largest payments companies from expanding outside the U.S. through M&A, analysts say.

Global Payments Inc. said May 28 that it would merge with Total System Services Inc., a move seen as necessary for survival in an industry that saw two other megamergers only months ago.

But a global land grab is underway in the merchant acquiring industry as markets open their borders to international companies, making scale more important than ever for firms that process payments for retailers and merchants. Even as it works toward closing its merger, Global Payments already has its eye on deals that would give it a foothold in other countries.

Global Payments has recently focused on acquiring high-growth companies to advance its software capabilities. The fight for control in critical geographies — such as India, Brazil, Argentina and continental Europe — demands substantial investments in technology, especially in e-commerce, analysts said. When rumors about the merger with Total System Services, often referred to as TSYS, surfaced days before the announcement, some analysts questioned the deal because it would not advance Global Payments' push toward international growth or e-commerce.

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But tie-ups between the company's biggest competitors created a new "sense of urgency," said MoffettNathanson analyst Lisa Ellis, who called the Global Payments-TSYS deal "defensive" and "necessary" for both companies. Had the other megamergers not happened, Global Payments would be better off continuing to focus only on global expansion and e-commerce, where the company is "quite weak," she said in an interview. The need to scale up by combining with TSYS may also have let Global Payments overlook the former's lower revenue growth.

The $22.14 billion tie-up marks the third-largest deal in the financial technology industry and the third megamerger this year, according to an S&P Global Market Intelligence analysis. In January, Fiserv Inc. announced its $21.79 billion acquisition of First Data Corp., and Fidelity National Information Services Inc. announced its $36.26 billion acquisition of Worldpay Inc. in March.

Shares of both Global Payments and TSYS have risen throughout the year as investors watched for how they would respond to their rivals' deals.

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Headquartered just 100 miles away from one another in Georgia, Global Payments and TSYS have discussed merging in the past. Analysts predicted the two companies would combine simply because they were the last major stand-alone merchant acquirer and issuer processor, respectively. The companies had to combine or risk losing scale — and the ability to negotiate better margins and pricing that comes with it.

Both had reasons to not merge previously, analysts said. TSYS was likely concerned about the local economy in Columbus, Ga., where it makes up a significant amount of the workforce, said Wolfe Research analyst Darrin Peller. Global Payments, on the other hand, has been largely focused on growing in e-commerce, a business line TSYS has not developed.

And the priorities of the two management teams differ. Global Payments is a serial acquirer, focused on becoming a technology-first payments company, MoffettNathanson's Ellis said. TSYS, on the other hand, is more conservative in its capital deployment and has remained exclusively a payments company, Ellis added.

Analysts expect the combined company to carry on Global Payments' interest in M&A. The company could do a "big international deal" a year from now, Ellis said.

On a call to discuss the TSYS merger, Global Payments executives stressed that the integration would not be prolonged, and management seemed to already have an eye toward future expansion. Since the merger is a stock-only deal, Global Payments' capital structure remains unchanged. It had $1.28 billion in cash and cash equivalents as of March 31, according to its quarterly filing.

Executives said the acquisition opens up possibilities in both Latin America and Europe. Since TSYS already has a presence in Latin America, that region will likely be a primary focus. The combined company must position itself "more strongly" in e-commerce and internationally, Ellis said, adding that she expects Global Payments to first target geographic expansion before shifting its focus back to e-commerce.

"This deal certainly helps them do that somewhat, but it doesn't put them in a leadership position," Ellis said. "They'll have more work to do."

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