Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

First Data's $750 Million Attempt to Jumpstart Growth

First Data Corp (NYSE: FDC) is struggling. In the fiercely competitive payment processing arena, rife with disruptive upstarts like Square Inc and deep-pocketed innovators like PayPal Holdings Inc, industry incumbents like First Data have found it difficult to find their footing, even as its share price has continued to rise. While several companies in this sector have significantly grown their business in recent years, First Data's revenue growth has all but stalled compared to its competitors in the payment processing industry.

In the company's 2017 first quarter, First Data reported total segment revenue of $1.7 billion, a 2% year-over-year increase. Not one of its business divisions grew revenue by more than 3% (though on a constant currency basis revenue growth was slightly higher). In its first quarter earnings presentation, the company stated it was still saddled with $18.6 billion in gross debt; undoubtedly remaining from its public spin-off from private equity group KKR in 2015. While its interest rate expenses have gone down considerably over the past few years, that's still a lot of debt for a company with a market cap of about $17 billion.

This is why it came as somewhat of a pleasant surprise when First Data announced it would be acquiring CardConnect Corp for $15.00 per share (or about $750 million) in late May.

SQ Revenue (Quarterly) data by YCharts

Who is CardConnect?

CardConnect can probably best be described as a technological commerce solutions company that brings better security, integration, and data analytics to a business's payment processing platform. Cardpointe, one of CardConnect's flagship payment processing platforms, offers vendors real-time transaction management, a mobile app for accepting payments from mobile devices, customized reports, regulatory compliance management, and encrypted and tokenized transactions.

In the initial press release announcing the acquisition, Fist Data made it clear it believes CardConnect's capabilities will help with merchant retention and give it access to new markets. First Data also expects the merger to be accretive to its earnings before any expected synergies are even realized.

Image source: Pixabay.

This is about "accelerated revenue growth"

At Bernstein's 33rd Annual Strategic Decisions Conference, hosted just a day after the CardConnect announcement, First Data's CEO Frank Bisignano shared more of his thoughts on the deal:

"... when you thought about this company, First Data, and its acquiring business, at the heart of it, it's a partner management business. It's the largest partner management business in the industry ... when you look at the performance in their portfolio with their tool set, we see a tremendous impact they can bring to our own clients and their individual merchants, to run a better business and then to our whole business ... Of course, I love cost synergies and there are some of those, but this is really about accelerated revenue growth, a company that was growing at 20% on the top line and using those techniques and those tools across our whole portfolio."

These words should hearten First Data investors because it signals Bisignano understands that First Data cannot afford to lose any more ground to what are perceived to be more innovative competitors. It is no longer enough for the company to pay down debt and offer point-of-sale hardware. If First Data wants to retain its customers, it must also offer software solutions that will make it extremely difficult for clients to leave First Data's ecosystem, something its competitors are already doing.

Running with the herd or leader of the pack?

While CardConnect's abilities clearly improve First Data's offerings, it's still not clear if it is now competitive with other companies. For instance, Square for Retail, Square's platform developed for the distinctive requirements of retailers, offers real-time inventory and employee management. Global Payments Inc (NYSE: GPN) now offers Xenial, a restaurant platform whose capabilities include ordering, menu management, data analytics, and custom reporting.

In other words, the payments industry is no longer the technologically staid sector that simply provides terminals that allow merchants to accept card payments. In today's payment processing world, companies must do much more to entice and retain customers. While it's far too early to tell if this acquisition puts it on equal footing with the competition, it will undoubtedly help it retain clients and attract new customers. More importantly, it signals to investors that First Data understands the tough neighborhood where it resides and is ready to move from defense to offense.

10 stocks we like better than First Data
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and First Data wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of July 6, 2017

Matthew Cochrane owns shares of PayPal Holdings and Square. The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool owns shares of Square. The Motley Fool recommends Global Payments. The Motley Fool has a disclosure policy.