APRIL 16, 2003
STREET WISE
By Olga Kharif
First Data and Concord: A Power Marriage | The proposed combo would benefit merchants and give Visa and MasterCard stiff competition. No wonder investors are watching
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At first glance, First Data's plan to acquire fellow electronic-transaction processor Concord EFS doesn't seem too exciting. But look again. First Data (FDC ) processes close to 40% of all credit-card transactions, while Concord (CE ) handles more than half of the PIN-debit transaction market and a sliver of credit-card transactions. In short, a potentially lucrative marriage could result from this $7 billion all-stock deal, announced on Apr. 2 and expected to close later this year. The combined business, with expected annual revenues of $10 billion, would not only be the largest electronic-transactions processor it could become a major rival to credit-card associations Visa and MasterCard.
Investors have already taken notice. Since the deal was announced, First Data's stock has risen 3%. The traditional, signature-based credit-card market, First Data's bread and butter, is growing at only 3% a year, according to investment bank SunTrust Robinson Humphrey (STRH). But the PIN-based debit business -- when customers punch in their secret code to make a purchase -- is growing at 15% annually. Plus, the new entity -- expected to be called First Data -- could grab hundreds of millions in extra revenue a year by competing with the credit-card associations.
A NETWORK OF ONE'S OWN. Already, 21 of the 28 financial analysts covering First Data rate it a buy, assuming that the deal goes through without raising antitrust objections. Its share price of $37.45 is up 60% since October -- but still 11% below its 52-week high of $42. First Data's most recent report is a good omen: On Apr. 10, it announced that revenues for the first quarter (ended Mar. 31) increased 15% year-over-year, from $1.74 billion to $2 billion.
Here's what makes the proposition so potentially attractive: Most debit- and credit-card transactions today can be completed only by using Visa and MasterCard networks, regardless of what type or brand of credit, bank, charge, or debit card is used. First Data and Concord might be able to authenticate a credit card at a store, for example, or verify that the purchaser has sufficient funds in his account to make a purchase, but they often need Visa's help to get the money transferred from the customer's bank account into the merchant's. But Concord's national client base of some 6,500 banks and the companies' combined nationwide network through which to route transactions could give First Data the ability to accept and issue debit and credit cards, and complete nearly all transactions without help from Visa or MasterCard.
The deal gives First Data a chance to best the bank-card giants in providing more -- and better -- services, believes David Robertson, president of consumer-payments researcher Nilson Report. Concord's PIN-based network allows for faster routing of payments -- within a day, vs. up to several days for Visa and MasterCard -- so merchants get their money faster. Robertson also points out that PIN-based payments are cheaper for merchants to accept than signature-based debit and credit transactions, and that they offer better protection from fraud.
REDUCING DEPENDENCE. More important, First Data could eventually allow banks to issue cards under their own brands, instead of Visa or MasterCard. That would allow financial institutions to lessen their dependence on the card associations, as well as differentiate their brands and services more.
"I believe all transactions at the point of sale will soon be electronically signed," says Charles Fote, chairman and CEO of First Data. "Authentication might be a PIN, a fingerprint, or a secret code. And to me this [deal] is about how you bring it to this market faster than anybody else."
First Data's ambitions still face some hurdles. It would have to prove that the acquisition poses no antitrust threats. The combined concern would process 49.1% of all debit and credit-card transactions. Previously, First Data held 41.9% and Concord a 7.2% share of the total market, according to Deutsche Bank Securities. Competition worries mostly center around the 69% market share the new outfit will hold in PIN-based debit-card transactions, says Morningstar analyst Todd Lukasik. If the Justice Dept. sees antitrust issues, it could demand that the combined company dispose of some assets.
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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