o National Processing Inc. is on the block, or is it? In a cryptic notice sent out in late May, the Louisville, Ky.-based company that operates National Processing Co. (NPC), the nation's second largest merchant acquirer, said it was reviewing "various strategic alternatives, including but not limited to the potential sale of the company." The company then insisted it was not predisposed to selling NPC.

It could all be a hunting expedition, but there certainly is no dearth of suitors. The companies that are rumored to be potential buyers include U.S. Bancorp—which owns NOVA Information Systems—BankAmerica Merchant Services, and Total System Services, Inc. (TSYS).

Any company that acquires NPC would absorb significant market share, rivaling First Data Corp. for top billing in the market. NPC supports over 700,000 merchant locations, and by its own account handles one out of every five payments initiated using a MasterCard- or Visa-branded card.

TSYS is majority owned by Synovous, a financial services holding company based in Columbus, Ga., that provides both card acquiring and issuing services. TSYS also owns, in partnership with Visa U.S.A., Vital Processing Services, which processes merchant transactions on behalf of acquirers.

Vital has been watching its customer base erode as more large banks merge. Bank One Corp., one of Vital's largest client banks, was recently acquired by J.P. Morgan Chase & Co., parent of Chase Merchant Services, LLC, the largest merchant acquirer and a client of First Data Corp. Vital also provides processing services to Sears, Roebuck and Co; Sears' portfolio, worth an estimated $29 billion, was acquired last year by Citigroup.

More critically, though, Vital has a long-term processing contract with NPC, which could be lost in a sale of NPC. "The loss of NPC's business could leave a gaping hole in Vital's revenue stream," one industry consultant told me.

Bank of America has a large presence in the card acquiring business, especially among Internet merchants. BofA holds 10th place in the latest rankings of card acquirers (see the 2003 Acquirers Report, GSQ Vol. 6 No. 4, December 2003).

BofA's acquiring unit, BankAmerica Merchant Services, also processes merchant transactions through Vital. Combined, BankAmerica and NPC would have about $145.7 billion in the card acquiring business, making it the single largest acquirer, based on 2003 estimates.

U.S. Bancorp owns NOVA Information Systems, the fourth largest merchant acquirer according to our estimates. NPC ranked second in the GSQ 2003 Acquirers Report. Combined, NPC and NOVA acquired an estimated $312 billion in credit card transactions last year, a number that would place it clearly at the head of the billion-dollar acquirers' pack also.

Chase Merchant Services, the top acquirer last year, saw $225 billion in credit and signature debit card transactions. First Data Corp. acquired an estimated $116 billion in merchant card transactions last year, ranking it fifth in the GSQ acquirers list. Taking into consideration First Data's partnership interests in both Chase Merchant Services and Paymentech (number three in the 2003 rankings) the total value of card transactions that touch First Data approaches the $500 billion mark.

There are other potential buyers, too. Some experts speculate that GTCR Golder Rauner LLC, the Chicago venture capital firm, and retailing giant Wal-Mart might make an offer.

Most experts bet against Wal-Mart, pointing to its contentious relationship with banks, the card associations and acquirers, and repeated legal rebuffs of its attempts to enter the banking business.

GTCR owns terminal manufacturer VeriFone, Inc., merchant processor TransFirst, and a few other firms in the payments space. GTCR is also backing Tom Wimsett, NPC's former Chief Executive, in a venture known as Iron Triangle Payment Systems, which focuses on the pre-paid card market. The non-compete agreement Wimsett signed upon his separation from NPC is set to expire this fall.

Whether any suitors can or will bring to the table enough money to provide a hefty premium over NPC's market price remains to be seen. As we went to print, National Processing's stock (NYSE: NAP) was trading at $29 and change, or nearly twice its price two years ago. Its next earnings report is due out July 16.

National Processing is 84% owned by National City Bank in Cleveland, which, until recently, had pretty much left the merchant acquiring company to its own devices. In a 2002 shake up, however, the bank appeared to be reining in the unit when it ousted Wimsett, replacing him with a National City insider, John Gorney.

Gorney took on the added title of Chairman of the Board, and at the time, the bank said it would replace Gorney in the president's office; but nearly two years later no one has been named to that position.

Meanwhile, NPC has been expanding its sales reach through the National City branch network and shopping around for other growth opportunities, according to Gorney.

In 2003, it acquired Bridgeview Payment Solutions, now known as Best Payment Solutions, which added 30,000 new merchant accounts to its portfolio and 30 new ISO relationships to its sales force. Altogether, NPC says it has about 1,100 ISO partners, in addition to a corps of commission-only sales reps.

Some observers, however, speculate that National City Bank is anxious now to shed its involvement in the merchant acquiring business. "National City may have simply decided to cut its losses," one analyst told me.

In a letter to shareholders earlier this year, Gorney hinted that NPC was facing some tough times. The company's net income was down about 5% last year over 2002 numbers, despite an 11% jump in transaction volume. He laid the blame, primarily, on an erosion of its national merchant business and a troubled airline industry.

"Significantly, much of our growth came from regional and small business accounts," Gorney wrote. "A critical strategy for 2004 will be the continued expansion of our regional business, where we enjoy good margins and growing market share." (NPC still acquires transactions for some national merchants, and it recently inked a deal with bookseller Borders.)

For the most part, NPC has been actively retreating from the national merchant market ever since it was burned by a large national chain that took away a chunk of business. As for the airlines, financial woes in that industry have been hanging like a dark cloud over the merchant acquiring business for several years.

NPC saw trouble coming two years ago and announced that it was pulling out of the airline business. But it was already locked into several multi-year contracts, and some of those airlines, squeezed by spiraling fuel costs appear to be teetering on the verge of bankruptcy.

Should an airline customer go under, the financial liabilities an acquirer would incur are significant. The airlines have no firm rules governing what becomes of ticket-holding passengers stranded by a bankrupt carrier.

It's up to the discretion of other airlines to step in and honor a bankrupt competitor's tickets. If none does, and the customer is stuck with an unusable ticket, Visa and MasterCard chargeback rules demand that the acquirer refund those customers' monies charged.

Experts are divided on whether this potential risk will make some prospective buyers think twice about NPC.

"Potential airline liabilities are the biggest question market," commented one industry consultant, but another insisted that airlines represent "minimal volume in this business, even at NPC."

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. She can be reached at patti@greensheet.com .