Friday, March 28, 2008
First Data Corp. and JPMorgan Chase & Co. are in dispute over how to divide the assets of Chase Paymentech Solutions LLC, a processing giant in both card-present and card-not-present commerce, according to documents filed by First Data March 13, 2008, with the U.S. Securities and Exchange Commission.
In its annual report, First Data, which owns 49 percent of Chase Paymentech, stated that the September 2007 acquisition by private equity firm Kohlberg, Kravis, Roberts & Co. initiated a change in control that gives Chase, the majority owner at 51 percent, the right to terminate the merchant alliance that governs Chase Paymentech before the current alliance contract's scheduled 2010 expiration.
But the division of assets, one that experts say could take months to resolve because of the complexity and sprawling holdings, appears to be a likely outcome. "There is substantial doubt about the continued existence of the company in its current form," Grant Thornton LLP, accounting firm and auditor for Chase Paymentech, said in a statement.
Should the relationship end, First Data has the right to receive 49 percent of both Chase Paymentech's contracts by value and the alliance's sales force. First Data said the disbandment would not have an effect on its income from continuing operations, but it could lose access to the bank's brand and the referrals it gets for new merchant accounts.
Chase Paymentech has approximately 600,000 merchants in its portfolio, including Wal-Mart Stores Inc., as well as many larger online and catalog retailers in the United States. The company processed 19 billion transactions in 2007 and handled $719.1 billion in bankcard charge volume. According to the auditor report, net income was up 22 percent and net revenues were up 7 percent from 2006.
But the possible split of Chase Paymentech may have precedent. JPMorgan Chase's Chief Executive Officer James Dimon believes in doing as many back-office functions in-house as possible. Dimon took the processing of Chase's credit card portfolio in-house last year by licensing Total System Services(TSYS) Inc.'s TS2 software to handle it.
When asked about how the switch will affect profitability, TSYS's Chief Financial Officer James B. Lipham said licensing revenues will be lower than processing revenues, but expenses will fall. However, Industry Consultant Steve Mott for Stamford, Conn.-based Better Buy Design said trying to divide merchant contracts and other assets is not a workable solution.
"I'm mystified as to how they're going to carve it up," Mott said in a statement. He sees the two sides eventually deciding to flip the current ownership ratio, giving First Data operational control and offering Chase a long-term acquiring agreement with ultra low fees for authorization and settlement.
The crown jewel, however, will likely be control of Chase Paymentech's e-commerce business. "If First Data got that, it would put a lot of wind in their sails," Mott said. First Data also plans to streamline operations by consolidating its disparate processing platforms with the goal of saving $200 million in annualized costs.
That is only part of First Data's restructuring, according to Michael D. Capellas, First Data's Chairman and CEO. "We do have more levers to pull," he said. "We are working on plans for more improvements."
A statement from Chase Paymentech confirms a new arrangement is in the works, though its final form is still unknown. The review period for the joint venture was extended 60 days to allow all parties to determine how they will operate as new business partners.
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