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Fiserv CEO defends deal target First Data as a 'great misunderstood asset'

First Data Corp.’s $17 billion debt load and business model are not obstacles to creating a successful merger with Fiserv Inc., Fiserv President and CEO Jeffrey Yabuki said during a call to discuss the deal.

Yabuki acknowledged that investors have long focused on First Data's debt, which has carried service payments that made it difficult to invest in acquisitions or innovative technologies. But throughout the call, he highlighted the disconnect between clients' positive perception of First Data and investors' more negative view of the company.

"Frank [Bisignano] and his team have been spending 99% of their time delivering excellence into the market and not spending the time convincing people that all of the pieces would line up because he knew they were going to line up," Yabuki said, calling First Data a "great misunderstood asset."

When asked about why First Data would sell now, Chairman and CEO Frank Bisignano said the combination is "way more powerful" than people understand.

Analysts often discuss the importance of scale in the payments industry, a fact also highlighted by executives on the call. Yabuki called scale "critical" in the global landscape of payments.

"The more reach and scale that you can have, the better off you're going to be in the future," he said. The combined company expects to have nearly $15 billion of adjusted revenue, a 36% adjusted operating margin and $3.6 billion in free cash flow before future growth.

Management plans to integrate Clover, First Data's cloud-based point-of-sale system, into Fiserv's cash management offering, Yabuki said. The executive also highlighted overlapping geographic locations, such as large pools of workers in Nebraska, Georgia and the tri-state area.

However, there is little overlap between Fiserv's and First Data's current services, Yabuki said, calling that "one of the beauties of the" combination. Fiserv has focused on the U.S., and First Data would bring international expertise, Yabuki said.

The companies expect to find $500 million in revenue synergies and $900 million in costs that can be cut. Nomura analyst Dan Dolev said that revenue expectations, which are about 6% of First Data's revenue, "seem reasonable" and are roughly in line with the expected 7% revenue synergies from Worldpay Inc.'s merger with Vantiv Inc., which closed in January 2018. Cost synergies "seem high, yet manageable," Dolev said in a note following the deal announcement.

Fiserv will acquire First Data in an all-stock $22 billion transaction, with the combined company to be known as Fiserv. Following the deal's closing, which is expected in the third quarter of 2019, Fiserv shareholders will own 57.5% of the combined company, and First Data shareholders will own 42.5%, on a fully diluted basis.

Fiserv's stock was down about 4.8% in midday trading Jan. 16.