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The cancellation of First Data Corp.'s agreement to purchase InComm Inc., a marketer and distributor of gift and other prepaid cards suggests merger options for prepaid card companie sare dwindling, industry observers say.
In a statement earlier this month, the companies said they mutually agreed to terminate the $980 million deal, which was announced in April.
The First Data deal fell victim to the collapse of the credit markets, contends Gwenn Bézard, research director for Boston-based Aite Group LLC, noting the transaction processor wanted to preserve cash and credit lines.
Based in Greenwood Village, Colo., First Data said it lost $230.6 million of its credit line when New York-based Lehman Brothers Holdings Inc. filed for bankruptcy protection in September.
"It has nothing to do with strategy–the acquisition made a lot of sense," Bézard says. New York-based private equity firm Kohlberg Kravis Roberts & Co. acquired First Data in September 2007.
Bézard notes that the deal's cancellation suggests prepaid card companies have fewer options for mergers and acquisitions in the current credit environment. Smaller companies, especially start-ups, which often base their strategy on being bought out as they grow, may subsequently face bankruptcy, he says.
"Some of the companies that are operating with a few months' cash may not have a path for exiting the market," Bézard says.
A First Data spokesperson declined to provide any additional information about the reasons for the termination of the agreement or whether any termination fees were involved.
In the context of the credit crisis, First Data may have decided the price was too high for InComm's two main assets: its processing technology and its distribution network, says Red Gillen, an analyst with Celent LLC.
First Data "may not have seen the incremental difference in their [processing] system and the InComm technology," Gillen says.
Atlanta-based InComm also declined to comment on why the deal fell apart, except to say it was mutual agreement by both companies. First Data remains a "strategic partner" for Incomm, and it plans to continue its relationship with First Data, Michael D. Gruenhut, InComm general counsel, tells Prepaid Trends.
Privately held InComm had $300 million in net revenue in 2007, up 46% from $205.5 million in 2006, Gruenhut says.
Asked whether the companies would look at merging again in the future, Gruenhut says there has never been a more difficult time to predict mergers and acquisitions. The company does not plan to change its strategy, he says.
The long-term trend for the industry, however, is that it will continue to consolidate, Gillen says. As prepaid cards become more popular, they become more of a commodity, so companies must compete on price, he says. "What is going to happen is that there is going to be price competition, so there is going to be less room for margins." Gillen says.
That means companies will look to have as many cards as possible and will look for ways to increase their margins and reduce the number of players that can capture that revenue. So acquisitions will pick up again in the future, Gillen says.
"Companies are interested in performing acquisitions, but the economic situation has to be right for a pick up in the number of deals," he says.
