Why Global’s Heartland Deal Matters

When Global Payments Inc.’s chief executive, Jeffrey S. Sloan, called his counterpart at Heartland Payment Systems Inc., Robert O. Carr, a few months ago, he had in mind the potential for a massive acquisition in the acquiring business. But, in making that call, he also took the latest step, and an emphatic one, in underlining the industry’s historic movement toward what has come to be known as integrated payments.

Sloan’s call ultimately led to the $4.3 billion cash-and-stock deal Atlanta-based Global announced Dec. 15 for Princeton, N.J.-based Heartland. The price tag represents the biggest deal in the acquiring business since 2007, when Wall Street wheeler-dealer Kohlberg Kravis Roberts & Co. took First Data Corp. private in a $29 billion transaction.

Heartland investors, who when the deal closes this spring will receive $53.28 in cash plus some Global stock to bring the per-share price to $100, appeared to be happy with the deal the day after the late-afternoon announcement. The stock rose nearly 12%. Global’s shares, on the other hand, slumped 8%.

That prompted a pessimistic outlook among some observers. “Looks like [Global] shareholders thought the price offered to Heartland [was] too high,” noted Gil B. Luria, managing director at Wedbush Securities, who follows transaction processors. Meanwhile, Heartland had shot up remarkably in a short time. The morning-after price represented “nearly a 30% premium to where [Heartland] shares were trading before the rumors of the deal started to appear,” he said at the time in an email message.

Regardless of stock performance, though, Global’s investors may have the last laugh if the company succeeds in knitting together its own and Heartland’s extensive operations. That’s because the deal brings together two acquisitive companies that have made major investments in recent years in a key sales channel that goes by various names, but can be summed up in the term integrated payments.

The channel relies on dealers of point-of-sale equipment, everything from cash registers to readers, scanners, and tablets, to build in software functions like payments and loyalty from processors like Global and Heartland. Merchant processor Vantiv Inc. first underscored this trend in dramatic fashion in May 2014 with its $1.65 billion acquisition of processor and integrated-payments impresario Mercury Payment Systems LLC. And now Global has trumped even that staggering figure.

What’s more, Global is buying technology for vertical markets it doesn’t already own. For example, its own OpenEdge unit, which manages the company’s POS dealer business and houses previous acquisitions Accelerated Payment Technologies (APT) and PayPros, does not have a focus on the restaurant and hospitality business. Heartland’s Heartland Commerce unit, which includes acquired companies like Dinerware, Xpient, and pcAmerica, does.

“Less than 5% of our OpenEdge volume comes from the combined verticals that Heartland serves so well: hospitality, quick-service restaurant, fine dining, dining, education,” said Global president David Mangum in a conference call with analysts held to discuss the merger on the day it was announced. “So [the Heartland deal] is really a terrific opportunity, actually, to add to make one and one equal three between those technology-enabled businesses.”

At the same time, Global clearly envisions Heartland’s technology focus helping to lead the combined company deeper into integrated payments, both domestically, where Heartland is focused, and internationally, where Global operates in 29 countries. “I would view this [Heartland deal] as a very natural extension of what we’ve been doing with APT and PayPros and, of course, OpenEdge,” noted Sloan during the call.

That Heartland largely complements, rather than duplicates, Global’s sales channels should also help in the matter of stitching together the two companies’ sales forces. Global relies in part on independent sales organizations while Heartland uses direct salespeople who are company employees.

That leads some observers to see potential for conflict. “It’s a shift in direction for Global Payments as they have planted a foot firmly into direct merchant acquisition, becoming in effect a competitor to its ISO clients,” says Adil Moussa, principal at AdilConsulting, an Omaha, Neb.-based firm specializing in acquiring.

But not everyone sees it that way, arguing that the differing specialties of the two companies will likely prevent friction. “It’s different verticals, that’s the key here,” says Jared Drieling, business-intelligence manager at The Strawhecker Group, also in Omaha. “I don’t think that’s one of the huge issues.”

In fact, one Heartland specialty, payments for tuition, fees, meals, and other education expenses, may turn out to be a gold mine for Global. “The education vertical is an attractive vertical, especially compared to restaurants,” Drieling says. “Education is very profitable, with high growth and a lot of opportunity for recurring payments.”

Another possible benefit accruing to Global from Heartland’s direct-sales philosophy is a tighter grip over distribution. Carr referred to this in the conference call when explaining the history behind Heartland’s decision to move away from the ISO model. That move, he said, has paid off lately with Heartland’s shift toward working with POS dealers.

“We were an ISO processor and we decided early on that we couldn’t manage the people, the ISO folks because they didn’t know who was selling for them,” Carr said. “This [direct sales] is the sustainable model in the industry for sales. And we’ve been able to incorporate the dealer communities with our [independent software vendor] purchases and demonstrate that we not only have the direct-sales force but we have the dealer partners around the country.”

If that’s the case, the marriage of acquiring with integrated payments just took a huge step forward, along with, after an extended hiatus, the industry’s apparent return to M&A.

—John Stewart