First Data Corp.'s stock has lagged in recent months, and analysts are watching carefully to see whether it can get on track through its alliance agreements.
The Hackensack, N.J., transaction processing giant is expected to reach $5.5 billion in revenues next year. Its stock price hit a low of $30.125 following its Oct. 22 earnings release that pointed to stalled growth in processing credit card transactions for retail merchants.
The shares were trading at $28.75 late Friday, 37% below the 52-week high of $46.125 in July.
The company has created an electronic billing services venture with Microsoft Corp., MSFDC, which could expand transaction volume.
It also has 11 banks participating in alliances to serve card-accepting merchants, in a program begun in 1994.
In the short-term, analysts do not expect much growth and payback from the ventures.
"It's going to be a couple of quarters before they get better insight," said Joseph Donaldson, equity analyst at Lehman Brothers in New York. "Everybody is now just watching and waiting."
Longer term, it will be crucial for the alliances to increase the transaction traffic that is First Data's lifeblood.
With competition intensifying, processing customers have more leverage to demand price concessions, and even large processors such as First Data must increase transactions to make up for thinner margins.
"This industry was once driven primarily by relationships, and now it is increasingly being driven by price performance," said Mark Wolfenberger, analyst at Deutsche Morgan Grenfell in New York.
First Data reportedly is looking to the bank alliances to increase the number of small merchants it processes. In a recent interview with American Banker, Roger Peirce, who heads the company's merchant activities, said it encourages banks to bundle its MasterCard and Visa processing with loans, payroll services, and other aspects of a financial relationship.
Although the market is wide open-an estimated three million mom and pop businesses in the United States-some observers question whether the alliance approach will work.
First Data's problem lies in how to "move downstream to the small merchants without disrupting the relationships in the alliances," said Wayne Segal of Deutsche Morgan Grenfell.
Mr. Peirce said Friday that he remained confident in the joint approach to small businesses: "I think banks are in a natural position to view the small-business customer as a prime source of new business."
Gregory Gould, analyst at Goldman Sachs & Co., said the alliance program needs time to mature. He said its success hinges on how the banks' sales forces are integrated.
"It's essentially 11 different mergers going on simultaneously," Mr. Gould said of the alliance deals. "If you look at it that way, then you'd see that it would take a little while to iron the kinks out."
"It hasn't really been effectively demonstrated," Mr. Peirce said. "We think we can do it."
