Last week, on the eve of the trial that pitted First Data Corp.'s ambitions against the Justice Department, the company capitulated to the regulator and agreed to divest NYCE Corp.
Many in the industry thought First Data would and had to do this, but they seemed puzzled that chairman and chief executive Charlie Fote had drawn out the process.
One possible reason: Mr. Fote won a concession from the Justice Department that lets his company compete for the bank customers that currently contract with NYCE and not with Star. This means that First Data could win back some or many of the bank customers it will lose by divesting NYCE.
The absence of a noncompete clause in the deal First Data hammered out with the government - an agreement that will permit the Denver company to buy Concord EFS and its Star network - will mean that prospective buyers will need to check out the commitment levels of NYCE's top customers before they sign a deal, according to executives at companies viewed as likely bidders.
An executive who identified himself as a prospective buyer, Stan Paur, the president and CEO of Pulse EFT Association, said that he was not surprised or bothered by the absence of a noncompete agreement between First Data and NYCE. What does concern him, however, is "what kind of commitments can be secured from the key institutions. If they're already locked up with another institution, it would greatly impact how any viewer looks at that network."
Mr. Paur continued: "It clearly diminishes the value of a transaction like that if you're unable to secure commitments. I think that was one of the problems of the original Star/Concord deal" - that the banks "were only locked in for a couple of years. That's the type of thing that people are going to look at."
Under its agreement with the Justice Department, First Data will treat NYCE as if it were already a separate company and will avoid any role in its governance or operations. The government has given First Data eight months to complete the divestiture.
There are some safeguards against First Data's cannibalizing the network, which handles PIN debit card processing for the major banks in the Northeast, including four that own stakes in it: Citigroup Inc., J.P. Morgan Chase & Co., FleetBoston Financial Corp., and HSBC Holdings. First Data must ensure that NYCE remains an "active competitor in the provision of EFT network services," and that "First Data shall use reasonable efforts to maintain and increase sales and revenues of NYCE."
Executives in the electronic funds transfer industry point out that even if First Data and Star had been prevented from competing with NYCE, nothing would stop Visa U.S.A. and its Interlink network from trying to coax away NYCE's banks.
Visa has already reeled in many major Star customers - including Wells Fargo & Co., Wachovia Corp., and U.S. Bancorp. Indeed, it was Visa's success in capturing Star customers that contributed toward the lower sale price agreed to for Concord.
According to David Banks, a spokesman for First Data, a noncompete clause was essential to Mr. Fote's decision to accept the Justice Department's terms and avoid a trial.
"When Charlie was out talking with investors, one of his concerns - if the NYCE divestiture was required - was that we would not be able to compete for their customers," Mr. Banks said. "I think it was important to us that we're allowed to be out there and compete on an equal footing when it is clearly an extremely competitive marketplace."
When First Data bought Western Union in 1995, and it was required to divest MoneyGram, the No. 2 money transfer company, there was a provision that said First Data could not go after MoneyGram agents for a certain period, Mr. Banks said.
But this situation is different. "Star can compete against NYCE and NYCE can compete against Star now," said Staci Busby, a spokeswoman for First Data. "That's the same as they've been doing."
A Justice Department spokesman said it felt that a noncompete clause was unnecessary.
"I can see how people might think this would be a problem," because First Data "could snatch up" all of NYCE's customers, but NYCE "is already established and has operated in the past as this relatively independent entity," the spokesman said. "So we're not going to have a noncompete clause in there, because we don't see a need for it."
NYCE's chairman and CEO, Dennis F. Lynch, said only that it was "too early to discuss the ramifications of how it's going to all play out."
Richard S. Jenkins, the senior vice president and corporate counsel for Shazam Inc. of Johnston, Iowa, said it made sense that the Justice Department did not "set up a noncompete, because they're in the business of promoting competition."
Mr. Jenkins, whose network is in the same line of business as NYCE, Star, Pulse, and Interlink, said that preventing First Data and Star from competing with NYCE would have given NYCE too much market power in the Northeast.
James L. Accomando, the president of Accomando Consulting Inc. in Fairfield, Conn., said the absence of a noncompete clause was a "huge win" for First Data and Mr. Fote. "He knew divestiture was a fait accompli for this deal to go through, but I think he got what he wanted," Mr. Accomando said.
Even so, being able to compete and actually taking customers away from NYCE are two different things. "Just because you can compete doesn't mean it's cost-effective to complete," Mr. Accomando said. "They have to challenge an incumbent that's been around for nearly 20 years and that's been doing a great job. You can compete, but it's going to be very costly."
John Gould, the director of consumer lending and bank cards for TowerGroup of Needham, Mass., called the deal a "win/lose." First Data can compete with NYCE but will get a lower price in the selling of NYCE too, he explained.
"The no-noncompete is another arrow in the quiver of the buyer to force the price down," Mr. Gould said. But the fact that First Data must divest within eight months is the main reason the price tag will be lower, he added.
Mr. Gould said he does not expect First Data to focus on wooing away NYCE customers: "I think [Mr. Fote] has a bigger problem in retaining other large issuers in Star than worrying about going and competing with NYCE," he said.
