First Data Corp. and First Financial Management Corp., perhaps the two most influential forces in electronic transaction processing, announced Tuesday that they had agreed to merge.
First Data, which would be the surviving entity, agreed to exchange $6.7 billion of its stock in what the organizations structured as a merger of equals.
By far the biggest such deal in fields relating directly to banking and payment systems, the combination is likely to have a broad impact on products ranging from credit cards to on-line electronic commerce.
The companies will have a combined $4 billion of annual revenue, a huge potential for savings on a premerger expense base of $3 billion, and a broad range of operating and marketing synergies, said Ric Duques, chairman and chief executive of First Data.
"We will be well positioned to grow rapidly," the companies said in a joint statement. "Because we are a service provider and not a hardware, software, or telecommunications company, we can offer our clients a choice of solutions to their processing, information, and transaction needs" not dictated by any particular technology.
Mr. Duques, based at First Data headquarters in Hackensack, N.J., was designated to head the combined company. Patrick H. Thomas, chairman and chief executive of Atlanta-based First Financial, would stay on as a special adviser to the board after the expected close of the transaction in the fourth quarter of 1995 or the first quarter of 1996.
Reaching for a size and scope of operations unprecedented in the payment-processing field, Mr. Duques and Mr. Thomas stressed that they will be dedicated to transaction-intensive specialties such as card processing, merchant processing, other credit card support, money order services, mutual fund processing, and check guarantees. These would account for almost 90% of total revenue.
They also pointed to the power of a combined sales force of more than 1,000 of 36,000 employees, and to the fact that each company's stockholders in the pooling of interests will end up with about 50% of the total capital of $13.6 billion, underlining the merger-of-equals approach.
Mr. Thomas hailed the deal as "tremendous, ... creating a very interesting franchise for the next millennium."
"It is very early in the game and our people are just beginning to sort out" how the companies will be integrated, Mr. Duques said. "But clearly, this will be a very powerful company going forward."
"We've done some analysis only at a macro level, but on the surface there are enough synergies to make this compelling from any vantage point," said Mr. Thomas, who like Mr. Duques is 52 years old and has a reputation for having applied clear, tough-minded strategic thinking to the building of his processing empire.
The rejoicing of announcement day was tempered, if only slightly, by questions pertaining to antitrust concerns. Mr. Duques and Mr. Thomas brushed them off, citing their own lawyers' conclusions that their fast- growing markets cannot be construed as overly concentrated or closed to new competition.
"We are confident that we will be able to satisfy all the regulators," said Mr. Duques. "We don't anticipate having to make any divestitures or sales."
But the Department of Justice and the Federal Trade Commission are known to be scrutinizing credit card and other electronic payment businesses.
Last year, when both First Data and First Financial were pursuing Western Union Financial Services, the FTC told First Data that if it won, it would have to divest its Moneygram business to keep Western Union. That became irrelevant when First Financial won Western Union, but the antitrust question should come up again.
The federal antitrust regulators have never formally weighed in on the credit card acquiring, or merchant processing, business, where First Financial's Nabanco subsidiary is No. 1 and First Data's Electronic Funds Services division is No. 3.
Merchant processing "is already a very concentrated industry, and it's getting even more so," said David Poe, a consultant with Edgar Dunn & Co. in London. "There is a lot of logic" in the companies' move to achieve greater scale, he said, "but there may be restraint-of-trade issues. There may be a question of whether their dominance is taking competition out of the market."
"There could be a Microsoft-Intuit situation," said an industry source who wished to remain anonymous. "Or maybe (First Data and First Financial) are developing some new form of technology" that would prompt a closer look by regulators.
Developing new technologies is definitely part of the plan, said Mr. Duques. One of the most important benefits of commingling "is our ability to invest millions in technology, to be an innovator," he stated.
First Financial last year reported $2.2 billion in revenues, a 32% increase over the previous year, and $160.2 million of profits. First Data earned $208 million on $1.7 billion in revenues. It said its 20%-a-year earnings growth target will not be compromised by the merger.
As a $4 billion company, First Data would dwarf individual competitors in the various aspects of its business.
Size is not the only determinant of antitrust vulnerability, a legal source pointed out.
Donald I. Baker, a former assistant attorney general for antitrust who now runs a law firm in Washington, does not foresee major obstacles.
Mr. Baker believes that because the card processing business is not brand driven, as opposed to a regional automated teller machine service, it is easy for merchants to switch processors if prices rise.
While acquisitions have taken out many smaller processors - Card Establishment Services, which was especially acquisitive, was itself swallowed up this year by First Data - the market remains relatively crowded and is attracting new entrants like MCI, according to John Elliott of First Data. (See related article below.)
Based on MasterCard and Visa transactions alone, Nabanco has a 17% market share and CES 11%, according to The Nilson Report. National City Processing Co., which is owned by the Cleveland-based bank holding company, is between them at 16%.
But MasterCard and Visa processing is a narrow slice of all of the 400 billion transactions conducted annually in the U.S. alone, totaling $5.5 trillion, First Data said.
Mr. Thomas said First Financial initially approached First Data about the acquisition about 30 days ago. If First Financial had been the acquirer, "there would have been a dilution of our shareholders. We didn't let personalities get in the way of our fiduciary responsibilities."
The negotiations were kept under wraps, and the announcement shocked other industry players.
"I was astounded," said Liam Carmody, a prominent payment systems consultant. "I might have guessed an alliance of some kind, but not this - it changes everything."
MasterCard and Visa, which have been known to be leery of the growing influence of outside processors, each issued statements that they intended to analyze the merger more closely and assess its impact on members and the payment system.
Jeffrey Kutler contributed to this article.