First USA Paymentech Inc., the third-largest payment processor for retail merchants and one of the glamor stock issues of last year, has stumbled over some harsh post-merger realities.

The company, controlled since June by Banc One Corp., last week revised its earnings for the June 30 quarter downward by $16.4 million and said it would not meet consensus forecasts for the current quarter.

Paymentech has been one of the stars of the fast-growing merchant processing side of the credit card business, but analysts said the surprise announcements raised questions about its future. Before the earnings revision, analysts had been saying that Paymentech was undervalued.

Two weeks ago Paymentech's shares fell $5.625 after an analyst's downgrade. Last Thursday the share price tumbled a further $5.87, to 16.375, following the earnings announcement.

On Friday, the stock Rose 6.2 cent to close at $16.875

Paymentech said the problems stemmed from a slower pace of cost savings, losses by direct response merchants who suffered because of the United Parcel Service strike, and the repricing of several processing relationships.

"As things stood two weeks ago, I and virtually every other analyst that followed this stock liked it a lot, and felt if anything that it was undervalued relative to its prospects," said Franco Turrinelli, research analyst, William Blair & Co., Chicago, Illinois. "Banc One's ownership of First USA Paymentech has been unhelpful at best in terms of Paymentech's ability to compete-but also in terms of Paymentech's management's ability to focus on the business."

Many industry experts have blamed the recent merger between Banc One and Paymentech's parent, First USA Inc., saying the Columbus-based bank has cast a pall on the Dallas-based processor's Gensar operation, which serves banks that in turn sign up merchants.

Paymentech acquired Gensar Holdings Inc. for $170 million several months after its public offering in March 1996. Analyst Gregory Gould, a vice president at Goldman Sachs & Co., said Gensar has become a drag on earnings because banks are reluctant to sign with it, given its connection with Banc One.

"The problems are related to management's being distracted by Banc One and Banc One's hurting Gensar," said Mr. Gould. "When I downgraded the stock I did so because management was circumspect about commenting on business."

Not only do other banks see Banc One as an aggressive competitor, but its own merchant processing arm, called Banc One Payment Services, competes directly with Paymentech. It is also involved in an alliance with First Data Corp. of Hackensack, N.J., the largest transaction processor in the U.S.

Last winter experts forecast the following possible outcomes:

Banc One could allow Paymentech to continue operating as a stand-alone unit.

Banc One could fold its own merchant processing operations into Paymentech's, or fold Paymentech's operations into Banc One's.

Banc One could sell its 57% stake.

An accounting issue has tied the companies' hands. Because the Banc One/First USA deal was a pooling of interests, an equity sale could disrupt postmerger processes governed by Securities and Exchange Commission guidelines.

Banc One has "a controlling interest in us and they are a competitor at the same time," said Pamela H. Patsley, president and chief executive officer of Paymentech. "They are a bank and we do business with other banks, and certainly in certain regions that may not be a comfortable position."

What Banc One "has publicly stated is that they want us to run independently," Ms. Patsley continued, but the bank must do so in a manner that would not "disrupt the pooling of interest that they used on the First USA/Banc One merger."

Paymentech may have received little attention in the run-up to the merger because it makes up only 15% of First USA, an investment banker said, making it a relatively small part of a $7 billion deal.

Still, Paymentech did well after its initial public offering in March 1996. Starting at $21 a share, it soon rose to $47.

Some observers are concerned that Paymentech's problems could burst the bubbles of other merchant processors, which are trading at price-earnings multiples in the 40s.

"There are eight publicly held companies in this space with two thirds of the processing volume," said Robert Hyer Jr., a Smith Barney Inc. director. "Each one says it expects 20% to 30% growth, but the industry's processing volume is only growing 13%."

The only way to hit those high targets is further consolidation or finding new sources of revenue, said Mr. Hyer.

"We need to get those estimates down and not include a component for acquisitions," Ms. Patsley said.

"If acquisitions come, that's wonderful-we want to be very aggressive in pursuing those," she said. "But we need to keep our eye on building this business and the value of this business for the long term. That's my view and the view of the management team here."

Paymentech "addressed the concern, and we can see the light at the end of the tunnel," said Mr. Gould. "Four quarters from now we'll see earnings accelerate, and Gensar won't be a drag anymore starting the first quarter in 1998." u

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