In a quarterly earnings call held on short notice, top management at FIS Inc. confirmed early Monday the Jacksonville, Fla. -based company plans to spin off its merchant-services business within the next 12 months. The move comes less than four years after FIS acquired the big merchant processor Worldpay for $43 billion and follows a review at FIS that concluded the company could not invest adequately in the merchant unit to spark growth, top management said during the call.
Wall Street reacted negatively to the news. FIS’s shares were trading just shy of $64 per share an hour after the call, down 15% from Friday’s close.
The decision to divest the merchant unit, which consists chiefly of Worldpay, follows a strategic review conducted after Stephanie Ferris replaced former FIS chief executive Gary Norcross on Jan. 1 in a management reshuffling the company announced in October. Ferris, who had been a top executive at Worldpay, joined FIS as chief operating officer after the acquisition.
The reasons for the spinoff “really came down to capital allocation,” Ferris told the analysts. “The payments market needs a lot more [growth by acquisition] than capital markets and banking,” Ferris told equity analysts in the morning call, referring to FIS’s other two business units. Once top management concluded it couldn’t give the merchant unit the capital it needed for growth, she said, it determined to follow through with the divestiture. “We are confident the Worldpay business can return to growth as an independent business,” Ferris said during Monday’s call.
FIS also announced Charles Drucker, a former CEO of Worldpay, will serve as an advisor during the process to divest the merchant solutions unit and will also return as CEO of the business after the process is completed. Drucker is a partner at New York City-based Artius Capital.
The spin-off will set up Worldpay as an independent, publicly held company, leaving FIS with its capital markets and banking solutions units. The latter is FIS’s largest division, generating $1.72 billion in revenue in the fourth quarter, or 46% of the company’s total revenue of $3.71 billion. Capital markets accounted for $771 million in revenue for the quarter, with merchant solutions contributing $1.18 billion. Revenue overall was up only slightly for the quarter compared to the same quarter in 2021.
Following the spin-off, FIS will continue to work with Worldpay, Ferris said. “We will be working out a commercial relationship and incentives on both sides to cross-sell each other’s products,” she told the analysts.
The decision to spin off the merchant solutions unit surprised some observers who recall the massive investment FIS made in the acquiring business only a few years ago, as well as its rationale at the time. “In 2019, FIS thought acquiring Worldpay was strategic, that there would be synergies with its other processing assets, that it would boost FIS’s otherwise anemic organic growth, and that merchant acquiring and processing would be easier to expand abroad than its other processing and network businesses,” notes Eric Grover, principal at Minden, Nev.-based consultancy Intrepid Ventures, in an email message. “The rationale made sense. Apparently however, it hasn’t panned out.”
But the move to let go of the Worldpay-led unit will benefit both FIS and the merchant solutions unit, Ferris argued, as FIS will be in a better position to execute strategic acquisitions. “Over the past few years, our inability to use M&A to put our best products forward” in merchant solutions was FIS’s biggest problem, she said.