Approached by Suitors, eFunds Starts a ‘Strategic Review’

Processor eFunds Corp. today gave further momentum to a financial transformation of the transaction-processing business by announcing that it has hired investment bank Goldman Sachs & Co. to explore what it calls “strategic alternatives” that could result in a merger. The eFunds disclosure comes just over a month after announcements that industry leader First Data Corp. plans to go private while Metavante Corp. will go public in a spin-off from its bank parent, Marshall & Ilsley Corp. (Digital Transactions News, April 2 and April 3). EFunds started the review after being approached “by certain strategic and financial parties who have expressed a desire to explore possible strategic alternatives,” the Scottsdale, Ariz.-based firm said in a release that included its first-quarter earnings. EFunds gave no details about the suitors. A special committee of eFunds' board of directors will oversee the review, which also includes its independent financial advisor, BlackRock Inc. In a 12-minute conference call this morning, eFunds chairman and chief executive Paul F. Walsh said eFunds had been approached before during his five years at the helm to explore possible “business combinations,” but wanted to remain independent as it focused on its growth plans. “Today, though, we cannot ignore the fact that our industry is undergoing great changes, as evidenced by the First Data and Metavante announcements,” he said at the call, at which he did not take questions. He also cited continuing consolidation among banks, including the proposed sale of Netherlands-based ABN AMRO, one of the world's largest banks. Change in the financial-services industry “is inevitable and will accelerate,” he said. The options eFunds is considering include remaining independent, going private, or merging with another company, according to Walsh. Viewed as staid by people unfamiliar with it, the payment-processing industry with its recurring revenues and vast potential to convert cash transactions to electronic suddenly is the darling of Wall Street. “The First Data transaction really brought that point home that transaction processing is getting an incredible amount of attention now,” says consultant Les E. Riedl, president of Alpharetta, Ga.-based Speer & Associates Inc. The industry transformation may force what Riedl calls tier 2 and tier 3 processors to pair up with bigger partners or go private in order to get the capital needed to expand in fast-growing markets such as Eastern Europe. EFunds, which expects to post revenues this year in the $600 million range, is much smaller than such rivals as First Data, Fiserv Corp., and some others. Riedl says only tier 1 players will have the resources to go after the new markets. “There will be only a handful of those,” he says. EFunds traces its origins to Deluxe Data Systems, a debit card processor and check-services provider owned by check printer Deluxe Corp. that became independent in 2000. Under Walsh, the company has shed slow-growing ATM businesses, expanded internationally, added transaction-security services and entered the fast-growing prepaid card market with its acquisition of WildCard Systems Inc. EFunds reported first-quarter earnings of $11 million, flat with the year-ago quarter, on revenues of $134 million, down 4% from $140 million in 2006's first quarter. The review announcement, however, produced a 12% boost in eFunds' share price to $31.91, just shy of the stock's 52-week high.