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In the summer of 2019, the giant processor FIS Inc. massively expanded its merchant-acquiring business with its deal for Worldpay. The $43-billion acquisition was supposed to hand FIS a huge advantage in economies of scale and let it leapfrog rivals like Fiserv Inc., which itself had just completed a $22-billion merger with First Data Corp.
Last month, that whole rationale fell apart as FIS announced it will spin off Worldpay as an independent, publicly held company.
In a quarterly earnings call held on short notice, top management at FIS confirmed the Jacksonville, Fla. -based company plans to spin off its merchant solutions unit—which is composed mostly of Worldpay—within the next 12 months. The move follows a sweeping review at FIS that concluded the company could not invest adequately in the merchant unit to spark growth, top management said during the call.
The decision also follows by mere months the company’s move to replace its long-time chief executive, Gary Norcross, with Stephanie Ferris, who had been a top official at Worldpay and had come to FIS as a result of the merger.
Wall Street reacted negatively to news of the spin-off. Its shares were trading just shy of $64 per share an hour after the call, down 15% from the closing price the previous business day. They were still priced in the high $60s later in the week.
The decision to divest the merchant unit follows a strategic review conducted after Ferris took over on Jan. 1 in the management reshuffling, which the company had announced in October. Before her promotion, Ferris had been serving as chief operating officer.
The reasons for the spinoff “really came down to capital allocation,” Ferris told analysts on the call, in which company officials also reviewed fourth-quarter 2022 and full-year results. “The payments market needs a lot more [growth by acquisition] than capital markets and banking,” Ferris said, 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,” she added.
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 represents a stunning reversal of what many observers at the time of the Worldpay deal had seen as an inevitable consolidation trend in processing. Besides the FIS/Worldpay and Fiserv/First Data deals, Global Payments acquired Total System Services around the same time in a $21.5-billion all-stock deal (“In the Wake of the Mega-Mergers, March 2020).
Still, the banking unit 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 for the company overall was up only slightly for the quarter compared to the same quarter in 2021.
Still, FIS isn’t through 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 observers who recall the massive investment FIS made in the acquiring business a few short 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.
