Total System Services (TSS) stock appreciated 57.8% in the first half of 2019, according to S&P Global Market Intelligence, as the company agreed to be acquired by Global Payments (GPN -0.61%). The acquisition marked the third major acquisition in the payments industry in the first half of 2019, following Fiserv's (FI -0.52%) acquisition of First Data Corporation (NYSE: FDC) and Fidelity National Information Services' (FIS -0.98%) acquisition of Worldpay (WP). As such, some may wonder if the acquisition was done out of defensive necessity amid new competitive threats.
As part of the deal, Total System Services will get 0.8101 Global Payments shares for every share of Total System Services, which equates to an equity value of $21.5 billion. At the time of the acquisition, that amounted to just a 5.7% premium, a much lower premium than the First Data and Worldpay acquisitions, which were made at 29% and 21% premiums, respectively. Of course, the Total System acquisition happened in May, months after the First Data and Worldpay acquisitions happened and further into the market's recovery from the December 2018 swoon.
After the merger, Global Payments will own 52% of the combined company, with Total System shareholders owning the remaining 48%. Though this combination will create a company with payments solutions on both the merchant and issuer sides of electronic transactions, the new Global Payments will have an outsized 68% of revenue coming from merchants, with only 22% coming from issuers, and another 10% from consumer solutions.
The combined company will be battling against the other two major merged players as well as fintech upstarts such as Square and Europe's Adyen. That's a tall task, and at least one analyst isn't so bullish.
Dan Dolev of Nomura Instinet thinks the acquisition is a bit desperate, and points to Square's cash app and new debit card potentially threatening Total System's Netspend service for the underbanked. In addition, Dolev points out that Total System's revenues were up only 4.8% and North America network fees were only up 3% in the first quarter, compared with network operator Visa having 8% volume growth, showing Total System may be lagging the industry for some reason.
That, combined with the fact that the Global Payments-Total System Services tie-up was the last of the big payments megamergers, makes me cautious on Total System and Global Payments for now, with a preference for either the payments disruptors or the earlier mergers in the space.