Bank technology stocks were a mixed bag last week, reflecting broader market uncertainty and a blockbuster deal by First Data Corp. that drove down prices of its rivals.
While shares of financial software firms and outsourcing companies rose, the stocks of other banking systems vendors particularly payment processors -- were lower.
The payments business was rocked by the announcement that First Data had agreed to acquire merchant processor Card Establishment Services Inc. First Data officials said they would pay $500 million in stock and assume $180 million in debt upon closing, expected early next year.
The deal was clearly a coup for bank-technology investment bankers Welsh, Carson, Anderson & Stowe, which purchased Card Establishment from Citicorp two years ago for less than $200 million.
Richard Bove, an analyst with Raymond James and Associates in St. Petersburg, Fla., said he was not surprised by first Data's move: He had predicted last month that the Hackensack, N.J.based company would go quickly on the acquisition trail after losing its bid for Western Union Financial Services to rival First Financial Management Corp.
"The structure of First Data required that they go out and get into the end-product market," because until now the company was primarily a data-processing subcontractor to merchant banks, he said. Mr. Bove added that with the recent deals to acquire Card Establishment and the merchant business of Envoy Corp., the company has a broader product line the better to compete with First Financial.
He said he believes First Data still is at some competitive disadvantage to Atlanta-based First Financial.
"What [First Data] still lacks is a bank identification number and therefore cannot become a member of Visa or Mastercard, which increases the cost of doing business substantially," Mr. Bove explained, noting that First Financial already owns a bank to give access to payment-settlement systems. "First Data has to set up a special-purpose bank; that's an absolute necessity."
Other Wall Street analysts have commented that the price First Data is paying for Card Establishment is on the high side when compared to the company's current earnings.
But Richard K. Weingarten, an analyst at Montgomery Securities in San Francisco, said while he thinks the price First Data is paying for Card Establishment "is not dirt cheap; its management is most likely betting on the explosive growth potential in the payments processing industry.
"What you seeing is the natural evolution of the business," Mr. Weingarten said.
"With more the 80% of all consumer purchases in the U.S. still being paid for with Cash and checks, there is plenty of room for more than one winner."
The Card Establishment deal announced last week overshadowed other news involving First Data: American Banker reported Wednesday that the company has signed a letter of intent to buy a majority stake in 440 Financial Group, a leading servicer of bank-managed mutual funds based in Worcester, Mass. Terms were not disclosed.
First Data's stock closed at $49 Friday, down 50 cents.