(Marketwatch)-- Financial technology companies Fiserv Inc. and First Data Corp. plan to combine in a $22B all-stock deal, which analysts say may spur a wave of industry consolidation.
The deal could be “the largest in payments and financial technology history,” according to Fiserv CEO Jeffrey Yabuki.
The combined company expects to be the market leader in global issuing and merchant processing, and it will give two entities that currently play in different areas of payments transactions the opportunity to touch the entire purchase experience.
That end-to-end role the merged company will fill could send financial technology peers scrambling to do deals of their own.
“Consolidation is inevitable in this space, and the integrated approach seems to be optimal,” BTIG analyst Mark Palmer told MarketWatch. “This will put pressure on others to find partners and spawn additional M&A.”
The overall theme, he said, is for the customer to face one provider rather than deal with multiple companies for different elements of a transaction.
First Data shares rose 20% in Wednesday trading, to about $21, though the stock is trading below the $22.74 it was valued at in the $22 billion all-stock offer. Fiserv shares are off 4.5% in the session.
MoffettNathanson analyst Lisa Ellis isn’t ruling out the possibility of a competing bid for First Data, given the impact that a First Data/Fiserv combination would have on the industry and Wall Street’s higher expectations for First Data shares: The average analyst price target prior to the deal announcement was in the neighborhood of $26, according to FactSet, and First Data’s stock hit a high of $26.62 in the fall.
Fiserv and First Data are two of the three largest bank processors, Ellis said, and Fidelity National Information Services Inc.or FIS, is the third. For FIS, the deal “definitely leaves them a bit out in the cold,” according to Ellis. She deems it “entirely possible that FIS could launch a counter offer” or at least look into potential combinations with Total System Services Inc. or Jack Henry & Associates, Inc. the Nos. 4 and 5 players in the space.
Ellis called the combination “a really good deal for Fiserv shareholders” and said she expects more consolidation in the merchant-acquiring landscape as well, though general volume trends may drive those mergers more so than the threat of a joint Fiserv/First Data.
Fiserv’s management expects that the deal will result in $900 million in total cost synergies, and MoffettNathanson’s Ellis is upbeat about ability of these two infrastructure-heavy tech companies to consolidate some data-center costs. The companies also project at least $500 million in revenue synergies.
Not all were cheering the deal, however. Buckingham Research’s Chris Brendler penned a note calling it an “unexpected and underwhelming” move for First Data, which went public in 2015 and has been focused on reducing its debt levels and improving its core operations.
“Selling here at this price suggests to us the intermediate-term outlook must not have been as good as we had thought previously,” he wrote. “Although KKR ownership may have played a role, we think it is more likely that there were structural impediments to FDC sustaining its recent revenue trajectory or worse, more serious problems in the bellwether [joint-venture] channel.”
He had a buy rating and $29 price target on First Data shares prior to the deal announcement and doesn’t cover Fiserv.
