First Data Corp., accelerating its drive toward dominance in credit card processing, announced Wednesday that it had agreed to acquire Card Establishment Services Inc., one of the top three providers of transaction services to retail merchants.
First Data said it will pay about $500 million in stock and assume $180 million in debt upon the anticipated closing of the sale early next year. That transaction would set a record for a merchant processing company and rank among the highest prices paid for any credit card related business.
The agreement promises a healthy return for Welsh, Carson, Anderson & Stowe, the investment company that managed the spinoff of CES from Citicorp in 1992 for less than $200 million.
The deal also raises First Data, already the No. 1 processor of accounts for credit card issuers, to a new level of competence and prominence in serving merchants, an area where the company has traditionally played a subordinate role to its bank clients that "own" the customer relationships.
First Data is making a big leap into full-service merchant processing through CES, which some bankers have lumped in with the growing number of nonbank threats to their control of payment services. But far from altering their strategy of supporting bank clients. First Data officials say they will turn CES and its resources to the banking industry's advantage.
CES is to remain an independent business unit, based in Melville,-N.Y., and will provide support for "merchant bank alliances" similar to a relati0nship that CES recently pioneered with Wells Fargo Bank. The bank stays in the forefront of selling and servicing merchant accounts, with CES as the back office.
"We will be offering to put the 170,000 CES merchant contracts back into the hands of the banks," said Wayne Johnson, executive vice president in First Data's Card Services Group, based in Omaha.
First Data has sustained some criticism, notably from Visa, for gobbling up increasing shares of both the account processing and merchants sides of the card business. Visa U.S.A. president Carl Pascarella has warned of First Data's ability to create a "closed loop" for transactions, which might not be accountable to card association standards or liability protections.
MasterCard International, which has been less antagonistic than Visa, considers the CES acquisition to be "the single largest shift in the acquiring business ever," said Fred Gore, senior vice president of U.S. acceptance.
Mr. Johnson said the CES deal and the "reclaiming" of bank merchant relationships will underline that First Data's intent is to build the necessary scale to minimize the costs of transaction handling. The company would then concentrate on its technology and core processing while leaving banks in control of their business dealings.
"We think it is absolutely critical, for the future of the banks and the vitality of the payment system, that the banks control the ownership of the merchant relationship," Mr. Johnson said.
First Data's role and intent, crystallized by the CES acquisition. puts the processing colossus on a collision course with companies like Nabanco, National City Processing Co.. and National Data Corp., which came to dominate merchant processing in recent years as many banks chose to concentrate on card issuing.
Although National City Processing is owned by National City Corp., a Cleveland-based banking company, it is widely seen as having contributed to the consolidation of merchant processing and a decline in banks' once dominant market share to 50% or less.
First Data is putting itself forward as a "white knight" for bankers at a lime when many are having second thoughts about their retreat from merchant processing.
CES is only the biggest piece of a merchant-servicing puzzle that First Data has been trying to solve through acquisitions. One source said First Data was courting CES for two years, though as rumors intensified in recent months they were repeatedly denied.
Last May, First Day bought Telemoney, a point of sale transaction business formerly owned by Ceridian Corp. In August, First Data agreed to acquire the merchant processing and point of sale businesses of Envoy Corp. for $156 million to $177 million in stock. That deal is expected to close in the first quarter of 1995.
Telemoney and Envoy were especially helpful in reinforcing what First Data calls its "front end" capabilities, said Roger Peirce, president of First Data's Electronic Funds Services unit and the architect of its merchant thrust. With banks almost universally outsourcing "back end" functions like transaction capture and accounting, CES can enhance existing economies of scale.
What made CES especially appealing, Mr. Peirce said, was its full range of front-end, backend, and back-office skills, the last including customer service, data capture, imaging, and other advanced technologies.
"CES and its creator, Citibank. put a lot of money and effort into becoming a full-service provider with an exceptional back office," Mr. Peirce said.
The 1,000 GES employees, including a sales force of 450 who are seen as critical to selling the alliance concept, will double the size of Mr. Peirce's group, which the former Visa executive runs from San Mateo, Calif. All have been told they will keep their jobs, and Thomas Staudt, CES president and chief operating officer, is reporting to Mr. Peirce.
John C. Elliott, chairman and chief executive of CES, is also staying on but without a day-today management portfolio. Mr. Peirce said Mr. Elliott will serve in an advisory role, helping to assess and define future payment systems and strategies.
Mr. Elliott. who was not available for comment Wednesday, expressed a desire "to do something else" Mr. Peirce said