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The Green Sheet Online Edition

June 07, 2007 • Issue 07:06:01

Market in acquiring state of mind

Merchant acquiring is garnering a lot of ink in the financial press, as investors bid up values on leading companies. And one of those companies - First Data Corp. - has thrown a financial lifeline to the contactless payments market.

First came news in April that private equity giant Kohlberg Kravis Roberts & Co. was offering $29 billion (or $34 per share) for First Data, which, in addition to merchant acquiring, has significant market share in card issuing services and transaction processing.

Then on May 16, the Blackstone Group, another large player in the asset management field, announced it would add Alliance Data Systems Corp., a provider of marketing, loyalty and transaction services, to its portfolio of private holdings.

At a cost of $7.8 billion (or $81.75 per share), Blackstone's offer amounts to a 30% premium over Alliance Data's closing share price ($62.96) on the day the offer was announced, according to Reuter's News Service. In late May, ADS was trading at just under $78 a share.

Just two days earlier, Chicago-based GTCR Golder Rauner LLC announced it was selling transaction processing service provider TransFirst to another buyout firm, Welsh, Carson, Anderson & Stowe, for $683 million.

WCAS' portfolio includes several information services companies, including BancTec, a financial imaging solutions provider. But none are involved directly in transaction processing or acquiring.

GTCR is no stranger to payments business lines. It owns National Processing Co., one of the largest providers of merchant acquiring services, and until just a few years ago, GTCR owned POS terminal manufacturer VeriFone.

TransFirst, originally known as ACS Merchant Services, has been in GTCR's portfolio since 2000.

KKR is new to the payments space, but it knows the retailing sector well. Its holdings include Toys R Us Inc., which operates several national chains.

Private equity and buyout firms are drawn to payments businesses, especially merchant acquiring and processing companies, by the large amount of cash flow generated. These firms often borrow as much as two-thirds of the purchase price, so the cash is used to pay down interest, the Reuter's report explained.

Typically, a buyout firm restructures and cuts costs at the companies purchased, then sells the investment. Or, as was the case with VeriFone, the company is taken public. In a recent exchange with employees, First Data Chief Executive Officer Henry C. Duques insisted that no "significant changes in staffing or structure" are planned "at this time as a result of this deal."

No new bidders as First Data invests in ViVOtech

Under the KKR deal, First Data had 50 days to find an alternate buyer. But in a statement released May 22, First Data announced it had received no takeover proposals and was ready to proceed.

KKR's completion of the buyout, which regulators and First Data shareholders still must approve, is expected by the end of the third quarter. Meanwhile, First Data is honing its focus on the emerging business of contactless payments.

The company announced last month that it has signed on as lead investor in the latest round of financing for ViVOtech Inc., which specializes in devices and software that use a contactless technology known as near field communication, or NFC.

NFC is a short-range wireless technology that supports tap-and-go payment applications, like those using MasterCard PayPass. Adoption of NFC-based payments is expected to surge as the technology is embedded in mobile telephones with increasing frequency. ABI Research expects NFC chips to be embedded in 20% of all mobile telephones (or about 292 million handsets) by 2012.

"As one of the many technologies First Data will be supporting, our recent investment in ViVOtech furthers our objective of bringing a new generation of terminals and mobile-phone-enabled payment services to our financial institution and merchant customers," said Barry McCarthy, First Data's President of Product Innovation.

Michael Mullagh, ViVOtech's CEO, sees First Data's financial commitment as a clear validation of this emerging technology.

"Given First Data's vast global footprint, this relationship will help accelerate the availability of these new services and the associated transformation of mobile phones into portable payment devices," Mullagh said. end of article

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