The Rewards and Risks in Fiserv's Purchase of First Data

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To compete in a fragmented market, consolidation is the name of the game. We recently learned that two significant companies in the payments and financial-services technology space are about to join forces. Fiserv (FI 1.70%) is buying First Data (NYSE: FDC) for $22 billion in stock, valuing the target at a 30% premium compared to where it was trading prior to the deal's announcement.

In this segment from MarketFoolery, host Mac Greer and senior analysts Emily Flippen and Jason Moser discuss the potential benefits of combining the financial services technology player and the payment processor, what each one brings to the table, and how this deal reflects the trends in the space.

A full transcript follows the video.

This video was recorded on Jan. 16, 2019.

Mac Greer: Let's begin with the big deal of the day, financial technology provider Fiserv is buying payment processor First Data in a $22 billion all-stock deal. Jason, that $22 billion number represents a nearly 30% premium over where First Data closed on Tuesday. First Data up big today.

Jason Moser: This is a very good deal for First Data shareholders. Congratulations! You should feel good about this. Fiserv is a company Matt and I talk about on Industry Focus here and there on Mondays. Ultimately, in a nutshell, this buys Fiserv market share into a part of the value chain that moves money around in this world of electronic payments. It gives the combined entity a chance to cut costs and boost margins over time, assuming they execute.

The mechanics of the deal, as you mentioned, are relatively fair. All stock. It does seem like Fiserv has had a decent past 12 months over the past three years. Before today's sell-off, the stock was up 67%. It's not like they're selling with the stock at depressed levels. That's good. Probably could have gotten away with issuing debt to do this. The thing about stock deals, stock is still theoretical. It doesn't cost them any money to do it. You see these big tech companies do it all the time, like Facebook buying WhatsApp. Everybody has an opinion on that.

Ultimately, First Data is a merchant acquirer. They just play a part of that transaction when you're going from the merchant to the Visa network, to the bank. That's what Fiserv does. It could be argued that their competitive position is a little bit trickier in today's world with Square and PayPal. That's why I think the deal was a pretty good one. I'm not sure I feel as strongly about First Data as I do about Fiserv. All in all, probably a sensible acquisition.

Emily Flippen: I think this is probably a testament to what's happening in the bigger space. We're seeing a lot of consolidation. There's a lot of small players acquiring other small players, big players acquiring small players in technology in general, like IBM and Red Hat, which we talked about. There's a lot of consolidation going around because we have so many new start-ups operating in the space. So, when I see stuff like this happen, it's not really a surprise. You can't have so many different operators within payments or other industries operating independently. There needs to be some consolidation.

Greer: Let's talk about that space, to wrap this story up. Jason, you talk a lot about the war on cash. We talk about names like Square and PayPal. Does this deal change your thinking at all in terms of that bigger war on cash?

Moser: It makes me feel like Square and PayPal's position is a bit stronger perhaps today than it was five years ago. To understand what Fiserv does -- these are two very different businesses. Fiserv is essentially a software provider for smaller financial institutions. That's a good business in which to be. You provide some good software to big banks like this. They don't want to switch systems ever. So, you deliver a decent product. Over time, you can develop some switching costs there, which is a little bit of a competitive advantage.

But I think the real question here is going to be, where is First Data's position in this value as we move toward this trend of electronic payments? Ten years ago, First Data's value proposition would be a lot clearer than it is today. I think today, investors, including myself, would ask themselves the question, why does First Data need to exist in a world where Square and PayPal are becoming more and more able to do more and more things? That question, time will only answer. A nice thing for Fiserv if, for some reason, First Data's business falls by the wayside -- again, they only issued stock to do it, so they're not really out of pocket. Shareholders get screwed, but hey, that's life.