CheckFree Deal Vaults Fiserv into Front Ranks of Bill Payment, ACH

Electronic bill-payment and presentment technology may be CheckFree Corp.’s sexiest products, but bank processor Fiserv Inc. will be get access to other fast-growing markets when its planned $4.4 billion cash acquisition of CheckFree, announced Thursday, closes.

Most notable, perhaps, is that CheckFree just happens to be the leading provider of automated clearing house processing software to banks at a time when the ACH network is evolving into a big-league consumer payment mechanism. “Fiserv certainly filled a big gap they had in the electronic bill-payment and presentment space,” Aite Group LLC senior analyst Nancy Atkinson tells Digital Transactions News. “But they certainly got a lot more than that.”

Marketed by CheckFree’s software division under the name PEP+, banks use CheckFree’s applications to move funds through the ACH system. CheckFree’s fiscal 2007 annual report claims, “more than two-thirds of the nation’s 14 billion ACH payments are processed each year through institutions using our software systems.”

Further growth seems likely with more paper-check transactions being converted into electronics every quarter as NACHA, the ACH’s governing body, introduces new e-check codes. In March, NACHA’s back-office conversion (BOC) application went live, and NACHA currently is working on an Internet-payments product currently dubbed Secure Vault Payments (Digital Transactions News, June 13).

“Over the last five years, most banks have moved to a vendor [ACH] solution rather than build it in-house,” says Atkinson. “ACH is perceived largely as a commodity market.” CheckFree founder and chief executive Peter Kight will take a yet-to-be-named position with Fiserv in addition to joining its board of directors.

One task that seems likely to come his way is assurance of a smooth transition to new ownership of the company he founded in 1981. While Fiserv is highly experienced in buying companies, swallowing CheckFree may prove challenging. “Biting off CF, which is a huge organization; I’m skeptical on how they’ll integrate,” says Atkinson. “It’s a big challenge for them.”

Under the all-cash deal, which is expected to close by Dec. 31, Fiserv is proposing to pay CheckFree shareholders $48 per share, a 30% premium over CheckFree’s closing price of $36.83 on Wednesday. The deal is subject to approval from regulators and CheckFree shareholders.

In a conference call this morning, Fiserv president and chief executive Jeffery W. Yabuki talked up the two companies’ complementary products and customer bases. While it has many products and services, including the Accel/Exchange electronic-funds transfer network, and counts the 100 largest U.S. banks as customers, Brookfield, Wis.-based Fiserv is best known as a core processor for 6,000 small to mid-sized financial institutions.

Norcross, Ga.-based CheckFree’s electronic commerce unit, which processed nearly 975 million bill payments in the nine months ended March 31, serves 21 of the top 25 U.S. financial institutions.

“CheckFree’s industry-leading payment and Internet-banking capabilities will significantly accelerate our strategic transformation, extending our service platform to the largest financial institutions,” Yabuki said in a statement. “This combination allows us to deliver the best available solutions to all of our clients to enhance growth today, and into the future. An important objective of the transaction is to tightly integrate electronic bill-payment and settlement capabilities with our core account-processing and risk-management solutions to create a unique value proposition unrivaled in the marketplace today.”

Edward Woods, senior analyst at Boston-based Celent LLC, said in a statement that the acquisition of CheckFree “will give Fiserv a legitimate foothold in the top-tier banking market with CheckFree’s market-leading bill-payment processing capabilities.” He added that CheckFree’s $245 million acquisition of online-banking software developer Corillian Corp. in 2006 “brings Fiserv broader consumer-payments breadth with payment warehousing and the market’s leading online-banking platform, giving Fiserv a solution to an age-old pain.”

The deal apparently was a long time in the making. A Fiserv spokesperson tells Digital Transactions News via e-mail that “Jeff Yabuki and Pete Kight began talking about working together when Jeff came to Fiserv as the CEO. They talked about doing business, and how that would work. This acquisition is a natural development out of that relationship.” Yabuki joined Fiserv in late 2005.

Fiserv has not yet disclosed details of how it will finance the acquisition, but borrowing will play a big part through investment-grade bonds and a credit facility. “Our strong cash flows and business model give us a wide range of choices,” the spokesperson says. The combined company will have pro forma annual revenues of about $6 billion and more than 27,000 employees.

Fiserv reported revenues of more than $4.5 billion in 2006. CheckFree reported revenues of $879.4 million and net income of $127.3 million for its fiscal 2006 year ended June 30, 2006. Yabuki says the deal should result in $100 million in annualized cost savings and $125 million in annual revenues through new cross-selling opportunities.

The Fiserv-CheckFree deal comes at a time when the payment-processing industry is undergoing a vast transformation through dealmaking. Publicly held processors such as First Data Corp. and Alliance Data Systems Corp. are going private in leveraged buyouts while Fiserv’s cross-town rival, Metavante Corp., is being spun off by bank-holding company Marshall & Ilsley Corp. And eFunds Corp. is about to be acquired for $1.8 billion by processor Fidelity National Information Systems Inc. (Digital Transactions News, June 27).