In some M&A deals, sellers hold out until they are sure that they are getting the best price. In others, getting out is reward enough.
The Western Payment Alliance's sale of its check processing operation to The Clearing House falls somewhere in between - but by all accounts the deal is much closer to the latter than the former.
Indeed, WesPay says the rationale for the deal rests with the $1 million that the banks that control it expect to save over the next three years as a result of the sale, which closed Dec. 31.
The Clearing House, formerly the New York Clearing House Association LLC, already had a sizable check clearing business, and the addition of WesPay's volume will bring it to roughly 3.1 billion items a year, valued at $3.6 trillion.
That volume is key. As more and more consumers and businesses make payments electronically, paper check volume is declining, which is driving up the cost of processing individual checks. By merging with The Clearing House's existing National Check Exchange service, the WesPay banks can spread their own fixed costs across a larger base and lower their individual expenses.
"The purpose of this deal was to essentially give it to" The Clearing House, Gerard F. Milano, the former chairman and chief executive officer of WesPay, said in a telephone interview Thursday. "It's a strategic opportunity with practical benefits from day one."
In another somewhat unusual twist, Mr. Milano left his WesPay job at the consummation of the deal to become the executive in charge of The Clearing House's check services business units. Mr. Milano will continue to work out of WesPay's San Francisco office.
Peter Yeatrakas, who was WesPay's president until the association merged with Bankers Clearing House, will serve as acting president and CEO, a WesPay spokesman.
Jeffrey Neubert, The Clearing House's president and CEO, estimated that U.S. check volume is falling 3% to 5% a year. "As the volume goes down, over the next three to five years WesPay would have been hard-pressed to reduce their operating costs in proportion to the falling volume," he said. "They probably would have seen their per-item costs increase."
Mr. Neubert said his company acquired all of WesPay's check servicing assets and liabilities but paid no premium. He would not disclose the value of the cash transaction.
WesPay will continue to offer automated clearing house service to its financial institution members. That said, WesPay uses the Electronic Payments Network subsidiary of The Clearing House as its ACH service provider. Though WesPay was not offering its ACH service for sale, Mr. Neubert said he would be interested in buying it should the association one day decide to get out of that business. Further, the check services deal gave The Clearing House the right of first refusal to buy the ACH business if WesPay decides to sell it, he said.
The Clearing House created the National Check Exchange in January 2002 by merging its check operation with two other regional clearing houses, Liberty Clearing House (formerly the New Jersey and Philadelphia clearing houses) and Northeast Regional Check Exchange on Long Island. The operation expanded considerably in April when National Check Exchange announced it would merge with the Chicago Clearing House.
National Check Exchange's per-item processing cost is roughly 0.025 cents, and Mr. Neubert said it expects that figure to go unchanged for at least the next three years. The key to keeping these costs flat is maintaining or increasing volume, and Mr. Neubert said he would be interested in absorbing additional regional check clearing houses in order to keep the stream of paper items flowing.
Mr. Milano said that joining National Check Exchange makes check processing less expensive for the WesPay banks. The regional association previously charged its members about 80% below what the Federal Reserve charged banks to exchange checks. As part of the larger organization, he said, that price falls 25% to 30%.
"WesPay couldn't sustain that level of efficiency in the face of declining volume, so we decided to pool our volume with other organizations," Mr. Milano said. WesPay has some 1,000 member banks and credit unions, but many of them are small institutions that outsource their item processing, he said; only 28 financial institutions use the check service.
Peter Allutto, the chairman of the National Check Exchange and a senior vice president at Bank of New York Co., said pooling check volume will help all participants save money on such expenses as check transportation. "You don't want to have the last check on the plane," he said.
