In what may be the biggest anticlimax in their careers, employees at First Data Corp. will walk into their offices Monday morning as employees of Fiserv Inc. And if Fiserv chief executive Jeffery Yabuki’s ambitions prove fruitful, the combined company will play a leading role in fending off nonbanks like PayPal Holdings Inc. and fencing payments within the banking universe.
The $22-billion, all-stock deal, which the two companies announced in January, ended up closing just about on schedule, despite a U.S. Department of Justice inquiry that emerged in April. “We received all our approvals without conditions,” Yabuki told stock analysts Thursday afternoon. “The entire organization is ready to kick off the new Fiserv.”
The combined company, which boasts about $15 billion in total annual revenue, will control consumer and commercial funding accounts through Brookfield, Wis.-based Fiserv’s core-banking relationships and merchant accounts via Atlanta-based First Data’s acquiring business. That will help generate about $4 billion in free cash flow annually by the third year of the merger, Fiserv projected in January.
But on Thursday’s call Fiserv’s vision took on more clarity. That strategy includes leveraging both Fiserv’s core business and the new First Data assets to streamline user payments by acting as the clearinghouse between merchant and user accounts. “We’re very excited by the idea of using the funding account to interact with any provider in a more frictionless way,” Yabuki told the analysts. Fiserv estimates First Data serves roughly 40% of U.S. merchants.
That leverage could also help banks by keeping payments within their orbit, Yabuki added. “The more we make sure transactions are happening at the point of sale so consumers aren’t going anywhere else, we’ll make sure banks are winning with their deposit gathering,” he told the analysts.
Away from the point of sale, Yabuki cited the bank-controlled Zelle peer-to-peer payments platform, which Fiserv supports alongside its own Popmoney P2P service, as an example of this fencing effect on behalf of financial institutions, many of which are battling rival services like PayPal’s Venmo.
It’s already a close race. Two-year-old Zelle, on Tuesday reported $44 billion in second-quarter volume. PayPal on Wednesday revealed its own P2P volume for the same quarter came to $46 billion, including $24 billion from Venmo.
A key factor in First Data’s merchant-acquiring business is its joint-venture agreement with Bank of America Merchant Services, the big bank’s own acquiring unit. That contract expires next June, leading some analysts Thursday to press Yabuki on the prospects for renewal and the consequences if BAMS falls away.
Though Yabuki conceded Fiserv has not had “any direct conversations with the bank,” the company does not “see any meaningful negative impact” coming. “We don’t anticipate any financial outcome that creates a negative impact to First Data’s earnings for the next five years,” he added.
Another issue the combined company will have to tackle is the $17 billion debt load First Data brings with it. Fiserv reported it is refinancing the debt with a combination of $12 billion in senior notes and another $5 billion in short-term notes. It’s a lot of debt, but Fiserv’s expectation is that loan-servicing costs should fall with lower interest rates on the new notes.
For the second quarter, Fiserv reported $1.45 billion in revenue, up 7% year-over-year. First-half revenue totaled $2.88 billion, up 6%. First Data reported $2.49 billion in consolidated revenue for the quarter, up 2%. Revenue for the first half of the year totaled $4.8 billion, slightly ahead of the $4.73 billion recorded for the same period in 2018. Its net income came to $275 million, down from $341 million in the year-ago period, though first-half profit came in at $444 million, a hair ahead of the year-ago total of $442 million.