Shares of Concord EFS have rebounded since the card processor's announcement that it was buying Pay Systems of America Inc., a Nashville- based payroll processing company.
In the four weeks before the announcement shares of Memphis-based Concord dropped 14%, to $25.25. But since the announcement the price has bounced back; the stock closed Friday at $27.0625.
The market viewed the deal as a timely response to problems that might be developing in the card processing sector.
For about 70,000 shares of its stock or a cash equivalent, Concord would be entering a business that is expected to generate $10 billion in annual revenues nationwide, according to Edward A. Labry 3d, president of Concord EFS.
"We actually wanted to get into this since last year," Mr. Labry said. "We are buying the expertise, technology, software, and the electronic tax filing systems to grow this business."
Payroll processing is dominated by Automated Data Processing and Ceridian Corp., each of which has billions of dollars in annual revenues. Pay Systems has only about $1.5 million, and 15 employees, but its potential value to Concord is significant, analysts said.
More than 60% of U.S. companies still process payrolls in-house, but small businesses are warming to the idea of handing the function to third parties.
The Pay Systems deal would give Concord another service to offer to its very large customer base, said F. Mark D'Annolfo, an analyst at Adams Harkness & Hill Inc. "It's not surprising, and a real good fit," he said.
Concord EFS has direct access to the payment system through its $292 million-asset EFS National Bank. Dan Palmer, chairman and chief executive officer of Concord, said buying Pay Systems could "increase our bank deposits from payroll deposits and tax withholding accruals."
In addition, he said, EFS National could "market new bank accounts to employees of these payroll customers."
Concord's prospects on the tax filing side look promising as well. Over one million businesses are compelled by the federal government to file taxes electronically by July 1, 1998, and many will need help complying.
Through its card processing business, Concord has access to many small to medium-size merchants-many of which are potential users of the services that Pay Systems will bring.
Concord's processing services for credit and debit card transactions generated nearly 80% of its $166 million in revenue last year.
Mr. D'Annolfo expects the company to report third-quarter revenues to exceed $65 million, or 18 cents per share-50% more than a year earlier.
Concord expects to release its earnings this month.
Financial terms of the Pay Systems deal have yet to be finalized. If it turns out to be a cash transaction, it could close in November, Concord officials said.
The company expects to incur no accounting charges in connection with the deal, they said.
