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First Data to spin off Western Union, tighten focus on card and merchant services

On Jan. 26, 2006, First Data Corp. announced plans to spin off Western Union, the world's largest money transfer business, and to realign and reorganize many of the remaining divisions within the company.

Although previous company statements indicated a major shakeup, the news came as a surprise to the industry as many had expected a divestiture of First Data's Card Issuing Services unit (see "First Data CEO Retires While Card-issuing Unit Struggles," The Green Sheet, Dec. 26, 2005, issue 05:12:02).

Western Union, a highly profitable business, will be separated into an independent, publicly traded company in a tax-free deal to shareholders (the spin off is expected to be completed in the second half of 2006). With its 225,000 agent locations in more than 195 countries and territories, Western Union reported about $4 billion in revenue and $1.3 billion in operating profit in 2005.

First Data said that by divesting the breadwinner, it will more effectively focus on its card-related businesses, some of which ended 2005 in the red.

First Data Chairman and Chief Executive Officer Ric Duques said that there is little synergy between Western Union and the rest of the company. "All of Western Union's clients are consumers, not businesses ... all other First Data clients are businesses," he said.

The new First Data

First Data will be reorganized into three divisions: First Data Financial Institution Services, First Data Commercial Services and First Data International.

Previously, First Data was organized into Card Issuing Services, Merchant Services and Payments Services (primarily Western Union).

Financial Institution Services (formerly Card Issuing Services) includes Card Issuing and Processing, Debit (STAR Network), REMITCO (checks) and Output Services (statements, mailings, card embossing). Card Issuing Services President David Bailis will head this division.

Commercial Services (formerly Merchant Services) will be led by Ed Labry, the former President of Prepaid Services. It will include Merchant Acquiring, Merchant Processing, Debit (acquiring), TeleCheck and Prepaid Services.

First Data International will include all business outside the United States that concerns both financial institutions and merchants. Pam Patsley will continue to lead this unit.

Duques said there is also a fourth group that includes about 10 slower growth businesses. Some of these have potential, but all are what he called "a drag on overall growth." He said the company will take a hard look at them to figure out which ones to keep or divest.

Making a commitment to card issuing

Although Merchant Services was profitable in 2005, neither it nor Card Issuing Services performed at the level of Western Union. Card Issuing Services did so poorly that it soured First Data's overall end-of-year financial statements. First Data, though, is not about to give up on a once highly lucrative enterprise.

"We have concluded that our shareholders will derive long-term benefit from keeping the U.S. Card Issuing business as part of First Data and taking concerted actions to improve this business," Duques said.

"This has been a tough few months, but we are making a long-term commitment to this business. While we do have revenue challenges, the business is far from weak. It's still number one or a strong number two in each revenue category."

Although the beleaguered Card Issuing Services will remain (though now under the new moniker), it is undergoing some major structural changes.

Among these is a workforce reduction of roughly 1,000 employees, which includes 293 employees of an Output Services plant in Macon, Ga.

A company spokesman said that First Data will relocate the print/mail facilities in Macon to the card-issuing headquarters in Omaha, Neb. and other First Data locations.

More changes coming

First Data plans to continually evaluate current structures, strategies and new ideas. Big changes especially are in store at Commercial Services (formerly Merchant Services).

Since assuming the Commercial Services helm, Ed Labry has been examining it critically. "We are perceived as being too big and hard to do business with," he said. "So we immediately change to a more sales-oriented and sales supportive organization with a strong client focus. We have to get very nimble at the street level." Success for this segment has remained constant at the national level with major retail chains. For long-term success, though, it is imperative that the company reach out to all merchant sectors.

"We have to go downhill to the smaller mom-and-pop-oriented [merchants] where we know that the margins are," Labry said.

First Data's goal is to sell, board, activate and begin processing these smaller merchants in a single day.

He is also dissecting merchant retention and ISO relationships, which are not as strong as they should be. "We must build on our retention tools," he said.

"We need to take a look at reasons why merchants leave us. We need to be proactive and call them and get them to stay on our service."

Article published in issue number 060201

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