Much of the world will look at the deal to acquire First Data Corp. as yet another massive private-equity purchase, this one in the financial services industry.
But for the banking and payments industries, the deal raises a very different and, in some ways more pressing, set of concerns.Related Link
The acquisition could help the Denver processing giant settle several lingering issues. For one, it needs to install a leader that can keep it on track after the looming departure of its current chief executive. It also needs to consolidate its numerous transaction-processing platforms.
First Data said Monday that it would sell itself to Kohlberg Kravis Roberts & Co. for about $29 billion, or $34 a share.
The processor is one of the most influential behind-the-scenes players in the financial industry, and in some ways its sale runs counter to recent trends in payments. The debit market has consolidated, Visa U.S.A. Inc. is preparing to go public, and MasterCard Inc. has already done so.
And more importantly for First Data, nimbler, though not necessarily smaller, rivals such as Total System Services Inc. are picking up market share.
Several analysts said that consolidating First Data's processing systems is a long overdue and much-needed project. Numerous acquisitions over the years have left the company with more than a dozen transaction-processing systems, and both executives and analysts have said consolidating them, though necessary, would be a complicated and expensive task.
"We expect to work on" consolidating processing systems, "because it's the right thing to do for the business," Colin Wheeler, a spokesman for First Data, said in an interview Monday. Selling itself to KKR would "allow us greater flexibility to make the strategic long-term investments for the future that we need to advance our business strategy."
When it announced its fourth-quarter earnings in January, First Data said that it was planning a project to consolidate 13 processing systems into four, and to merge 12 data centers into three. The company said then that the project would take about two and a half years and would cost $100 million.
TSYS, the processing company majority owned by Synovus Financial Corp., overhauled its processing system in the 1990s.
"First Data was about to embark on a pretty substantial consolidation of its platform and technology, but it's going to be expensive and painful to public investors in the short term," said John Kraft, an analyst at D.A. Davidson & Co.
Upgrading fundamental processing systems is a much-needed project at First Data, though the ongoing expense could drag down earnings, Mr. Kraft said.
"It's probably a little more palatable to do under private ownership," he said. "From a shareholder perspective, it's pretty attractive to get out now."
Robert J. Dodd, an analyst for Regions Financial Corp.'s Morgan Keegan & Co. Inc., said that such projects offer long-term benefits but bring short-term financial pain.
When a public company undertakes a large, capital-intensive initiative, "your stock price doesn't like that," he said. "As a public company, it has near-term impacts. As a private company, you don't necessarily have to worry."
Going private also may help First Data deal with its ongoing succession issue. Henry C. "Ric" Duques, who became its chairman and CEO for the second time in November 2005, said at the time that he would remain only through this year. He succeeded Charles T. Fote, who resigned.
Mr. Duques, who was also Mr. Fote's predecessor, has since engineered a major reorganization of First Data, including last year's spinoff of Western Union Co.
First Data said in December that it was evaluating three internal candidates to succeed Mr. Duques as the CEO. Most analysts say the candidates are the company's three division presidents: Ed Labry, who runs the commercial services division; Pamela H. Patsley, who runs the international division; and David P. Bailis, who runs the financial institution services division.
Mr. Wheeler said Monday that First Data's board likely will name a new CEO in August, before the anticipated closing of the KKR deal late in the third quarter.
The private-equity company would have a voice in the selection, he said, but he would not say whether First Data will look at external candidates. The hiring "decision will be made by our board with consultation with KKR."
Other than Mr. Duques, the current top executives are expected to remain with First Data. Mr. Duques was not available for an interview Monday, Mr. Wheeler said.
Lawrence S. Berlin, an analyst with First Analysis Securities Corp., said that if he were in KKR's position, "I would put my own person" in First Data's top office, someone with whom "you have a history, a trust factor."
But if the private-equity company elevated one of the three internal candidates, it likely would put the new CEO on "a tighter leash" than it would apply if an outsider were chosen, because First Data "has a few issues," Mr. Berlin said. "Look at the stock - the stock has not performed. Their earnings growth has not been great. To me, that says there's an issue somewhere, and until I know what it is, I'm going to watch them like a hawk."
Some analysts said that one area that might need more oversight is acquisitions.
For example, several said that First Data may have agreed to spend too much for the Polish payment processor Polcard SA. Last week First Data announced it would buy Polcard for $325 million, a price that Mr. Dodd said was seven and a half times Polcard's revenue.
If KKR were in charge when that deal was signed, "I doubt that First Data would have been able to pay that much," Mr. Dodd said.
