In the largest fintech and payments deal ever, Fidelity National Information Services Inc. (NYSE:FIS) and Worldpay Inc. (NYSE:WP) agreed to merge last month to form a new payments and financial services powerhouse. Under the terms of the agreement, Worldpay shareholders will receive 0.9287 Fidelity National shares and $11 in cash for each share.
Upon completion of the deal, shareholders of Fidelity National, commonly referred to as FIS, will own approximately 53% of the newly formed company, and Worldpay shareholders will hold the remaining 47%. The combination of stock and cash values the merger at about $33.5 billion, but when the assumption of Worldpay's debt is included, the deal's enterprise value inflates to a whopping $43 billion.
FIS primarily serves financial institutions by providing them with transaction processing, digital channel solutions, fraud prevention tools, and card issuing services. Worldpay makes the majority of its revenue by offering payment processing solutions to merchants. The new company will operate under Fidelity National's name at its current headquarters in Jacksonville, FL, and FIS CEO Gary Norcross will retain his role, while Worldpay CEO Charles Drucker will serve as the executive vice chairman.
The new FIS
In the conference call immediately following the announcement of the deal, transcribed by S&P Global Market Intelligence, the management teams from the two companies stated that the combined entity will be able to recognize new revenue opportunities and cost synergies that they would not have been able to realize separately. FIS now expects that revenue will grow organically between 6% and 9%, which will be coming off a much higher base and will generate $4.5 billion in free cash flow at the end of three years.
Fidelity National CFO James Woodall stated it expects to realize $500 million in revenue synergies, stating:
We have clear line of sight on global expansion of payment solutions in high growth markets such as India and Brazil, where we have existing presence at scale, enhancing fraud solutions and increasing authorization rates for our customers, driving significant increase in dollar volumes processed, cross-selling of payment processing, enabling faster payment initiatives and alternative payment types and expanding into B2B commercial payments in capturing the high demand for data analytics and insights.
Of cost synergies, Woodall said, the new company expects to see $400 million in savings, driven primarily by combining "issuing and acquiring capabilities from both companies, technology integration as we drive efficiencies in technology and data center costs and corporate costs through functional alignment of the combined company." These synergies, Woodall added, were incremental to the revenue and cost synergies Worldpay is recognizing from the Vantiv-Worldpay acquisition finalized in 2018.
A familiar story
Most noteworthy, perhaps, is that the agreement comes on the heels of a remarkably similar deal between Fiserv Inc. (NASDAQ:FISV) and First Data Corp. (NYSE:FDC) earlier this year. Fidelity National and Fiserv are the country's two largest issuer processors -- companies that process payments for retail banks, which serve consumers. This deal, like Fiserv's and First Data's before it, will give the new company processing capabilities on both sides of the transaction -- the bank's and the merchant's.
The fact that two such similar deals were made so close to one another raises an important question on the motives behind the latest merger. Was the deal reactive or proactive? Was it motivated by a desire to go on offense and take market share or a sudden realization that it needed to play defense? Norcross insisted the deal was made purely for strategic purposes for the two companies' sake, not because of how the industry was moving. Yet later he added:
[T]here's a lot of innovation going on. There's a lot of modernization going on. Our clients need to continue to look to compete in this very aggressive market. You've got disruptors coming in. So what we saw on the combination was really this end-to-end innovation we've been discussing on this call, and the ability to be able for our FIs [financial institutions] to gain access to world class merchant acquiring to be able to leverage data in very unique ways, to be able to drive other products with a much faster speed to market, and that's been a very consistent theme that we've talked about.
These comments, made near the conclusion of the conference call, paint a more honest picture. Fintech is changing both the payments and financial industries. Companies that don't keep up run a very real risk of being left behind for good. The two-sided data these transactions will provide to Fidelity National's clients will help them keep up with fintech upstarts, such as Square Inc. (NYSE:SQ), which uses the transaction data from its sellers to make business loans and is exploring options to open its own banking license.
A good deal?
The move looks particularly good for FIS shareholders. Overnight, the company went from reporting decreasing revenue in its most recent quarter to projecting high single-digit growth over the next three years. For Worldpay shareholders, the result of the announcement is a little less clear. The company was making consistent progress on its own large deal, finalized just last year, and was showing promising revenue growth and global scale.
Both companies were facing fierce competition from disruptive upstarts releasing innovative solutions at a rapid pace. This deal probably better positions the new company to meet these outside threats than they would have fared separately. That being said, it might be wise to hold off on investing in the new entity until investors see positive results.