CheckFree No More

In the 11 months since I rated online bill-paying specialist CheckFree (Nasdaq: CKFR  ) a likely outperformer on Motley Fool CAPS, the stock has performed admirably, beating the market by a good 15 basis points. But forgive me if I take a pass on the question of whether that makes me a genius, or just lucky.

You see, up until last week, CheckFree's stock had been essentially flat at $37 or so. The only reason it's up now -- and the only reason I'm (finally) once again ranked in the top 1% of CAPS players -- is that on Thursday morning, larger rival Fiserv (Nasdaq: FISV  ) announced a $4.4 billion buyout of CheckFree. Shelling out $48 cash per share, Fiserv will be paying a roughly 30% premium over CheckFree's pre-announcement price.

What's not important
What does that mean to CheckFree investors? First and foremost, it renders the contents of CheckFree's fiscal Q4 and full-year 2007 earnings report (released Friday) essentially moot:

  • $972.6 million in revenues for the year, an 11% increase over fiscal 2006? Nice, but moot.
  • $1.37 per share in profits, up less than 1% versus last year? Pathetic, but also moot.
  • $183.8 million in free cash flow, up 7% from 2006? Looks better than the GAAP number, sure, but it's now just as irrelevant.

What is important
In this time-crunched age, buyout announcements are a godsend to investors. Not only do they bring with them a stock-price bump, but they also save us the time needed to decipher earnings news. And within the universe of buyout announcements, cash buyouts are the best thing since sliced (and diced) collateralized debt obligations. Upon receiving one, you really only have one decision to make: (1) Sell the soon-to-be-acquired holding for a small discount to the ultimate purchase price, or (2) wait to be cashed out automatically when the sale closes.

Meanwhile, over at Fiserv ...
Fiserv investors aren't quite so lucky. They're now faced with the prospect of having to crunch the numbers and decide whether their company is getting a good deal. To help with that task, here's a quick rundown on their new prize. At $4.4 billion cash, minus CheckFree's $127 million in net cash, Fiserv shareholders are paying:

  • Roughly 4.4 times sales for CheckFree, a significant premium to the 1.7 times multiple that Fiserv commands.
  • About 35 times trailing earnings, whereas Fiserv proper sells for 19 times.
  • 23 times trailing free cash flow, versus Fiserv's own 19 times multiple.

I hope the above stats help to make everyone happy with this deal. On the one hand, they should please CheckFree owners, who can point to the sales and earnings multiples as proof that they got the better of this deal. Meanwhile, Fiserv investors can console themselves with the last statistic, which shows that Fiserv may not really be overpaying much here -- especially when you consider that CheckFree is growing a bit faster than Fiserv itself.

Speaking of which, other investors can play this game, too -- especially rival payment processors. Over at MasterCard (NYSE: MA  ) , investors worried about the falling stock price can view CheckFree's 4.4 times sales multiple as a potential floor to sustain their own stock price. And at Online Resources (Nasdaq: ORCC  ) , that same 4.4 multiple offers a valuation to look forward to.

CheckFree's acquisition isn't the first in the payment-facilitation biz, but it just might be the last. Now that Intuit (NYSE: INTU  ) has snapped up Digital Insight, Carlyle Group has closed the book on Open Solutions, and CheckFree itself has locked up Corillian, only S1 (Nasdaq: SONE  ) and Online Resources remain unbought. Stay tuned to the Fool, as we watch to see whether they can survive on their own.

Fool contributor Rich Smith does not own shares of any of the companies named above. The Fool's disclosure policy loves payday. 

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