Metavante Buys NYCE to Further An Ambitious Payments Plan

Metavante Corp., which today announced it is paying $610 million in cash to buy the NYCE electronic funds transfer network from First Data Corp. and its bank owners, sees the deal as part of a nearly $1 billion payments strategy that has led the Milwaukee-based processor to snap up other software and networking concerns in recent weeks. Two weeks ago, the company announced it was buying Advanced Financial Solutions Inc., Oklahoma City, Okla., a supplier of check-imaging software and owner of the Endpoint Exchange image-exchange network. And last month it bought The Kirchman Corp., a supplier of core payments processing software to banks. The acquisition of Montvale, N.J.-based NYCE, with its EFT switch and ATM and point-of-sale debit network, is “key to our payments solutions strategy,” says Frank D'Angelo, executive vice president and group executive for EFT and card solutions at Metavante. “[Now] we can do check electronification, ACH, image, debit, and credit.” The NYCE deal also gives Metavante a strong hand in the high-stakes game of processing debit card transactions secured by personal identification numbers. Monthly PIN debit volume at the point of sale is growing at 20% year over year, and as a processing market is seen by many observers as a better bet for growth than either signature-based debit or credit cards. “PIN debit is probably going to be the fastest-growing payment mechanism for the next three to five years,” notes D'Angelo. By acquiring a switch that currently handles some 24 million transactions a month, Metavante will take control of direct links to millions of consumer checking accounts, cutting out gateways, processors, and other middlemen that add to processing costs, says D'Angelo. “The key to PIN debit is to get to those funding accounts, and how efficiently you can do it,” he says. “If you have to go through several touchpoints, everybody takes a slice. By owning the switch we add value.” Metavante emerged as the winner of an acquisition derby that was touched off in December when, as part of a settlement with the U.S. Department of Justice, First Data agreed to sell its 64% stake in NYCE. As part of the settlement agreement, the DOJ allowed First Data to go ahead with its $7 billion acquisition of Concord EFS Inc., owner of the Star EFT network. That deal closed in April. Between 20 and 30 companies expressed interest in buying NYCE, observers say, and speculation often pointed to card companies like MasterCard International and American Express Co. that might have wanted to control a major debit switch in the U.S. market. NYCE is second only to Star in transaction volume. In the end, it was Metavante that was willing to shell out the hundreds of millions it took to secure the 19-year-old debit network, which drives more than 2,100 ATMs, links to more than 900,000 point-of-sale terminals, and boasts some 2,153 bank members. At $610 million, Metavante is paying almost 20 times NYCE's 2003 net income. “We believe we paid a fair market price,” says D'Angelo says. Others agree, while pointing out there may have been a “scarcity” premium built into the price to account for the fact that few other major EFT networks are available. “NYCE is the last sizable debit network that will be on the market,” says Les Riedl, an analyst at Atlanta-based Speer & Associates Inc. The price also reflects Metavante's confidence that it can convince NYCE's owner banks to go along with the deal. Most of the 36% of the network not owned by First Data is held by a quartet of major banks that flow a significant share of volume through NYCE. These banks– J.P. Morgan Chase & Co., Citigroup, HSBC Holdings PLC, and Bank of America Corp.?will receive almost all of the nearly $220 million in cash not going to First Data, but under their shareholder agreement they have first right of refusal on any deal. If they want to buy NYCE they have 30 days to match Metavante's bid and acquire First Data's shares. In a conference call with analysts this morning, Metavante executives said they have opened discussions with the four principal minority shareholders and predicted they would agree to the deal. “We're confident we can convince them we'll make a strong partner as owner of the NYCE network,” said Michael D. Hayford, Metavante's chief financial officer. The final cash price may help in that effort, but some speculate it may also have scared off some of the other bidders. “You're talking about an altitude here that's pretty aggressive,” says Riedl. The deal requires the review and approval of the DOJ. Pending that approval as well as the agreement of the minority shareholders not to exercise their rights of first refusal, Metavante expects it to close in July. The company expects to close its Kirchman acquisition this month and its AFS deal in June or early July. Metavante is paying $305 million in these two acquisitions, and so with the NYCE deal it will have paid close to $1 billion to build its comprehensive payments platform. The management of NYCE will remain in place and the network will become a subsidiary of Metavante, which itself is a subsidiary of banking company Marshall & Ilsley Corp.