The payments firm Worldpay spent less than five years as part of the bank technology company FIS, as the latter has decided it would be better to set Worldpay loose to scoop up other fintechs without the baggage that their affiliation has added to mergers and acquisitions.
"We haven't been able to allocate funds into M&A. That has been a weakness in our business," Stephanie Ferris, CEO and president of FIS, said during a conference call Monday to announce FIS will spin off Worldpay, which it acquired in 2019. "Our peers in the payments business have been doing M&A."
FIS has maintained an investment-grade rating because of the limits on capital allocation, and that rating would "probably impede" Worldpay in its dealmaking if it was not spun off, Ferris said.
The 100% spinoff is expected to take about a year. FIS appointed Charles Drucker, Worldpay's former CEO, to lead the separation and become CEO of the new unit, which will carry the Worldpay brand. As currently constructed, FIS's merchant business accounts for about 30% of its total revenue, with core banking making up 46% and capital markets covering the remaining 24%. Forty-three percent of Worldpay's revenue comes from enterprise clients, 27% from small businesses and 30% from e-commerce. FIS has about 12,000 financial institution clients in more than 100 countries. FIS' stock was down about 14% on Monday morning.
For the quarter ending Dec. 31, FIS reported revenue of $3.714 billion vs. analysts' expectations of $3.703 billion; and its earnings per share of $1.71 exceeded analysts' projections of $1.70. But the company's projections of $3.425 billion in earnings for the current quarter fell short of analysts' expectations of $3.563 billion, reflecting fears that a recession may occur and translate to weaker payments activity.
During the conference call, Ferris mentioned mergers several times and discussed the current economic environment for fintechs. Digital financial services firms have seen their valuations plummet during the past year, with
It may also lead to sales as relatively mature payment companies look to pounce. Visa CEO Alfred Kelly, who is retiring and being replaced by Ryan McInerny, recently suggested the falling fintech valuations are a "
"Given the market, where things stand with valuations coming down, the ability to go to the market will be quite fortuitous," Ferris said. "That's why I moved on this with a high sense of urgency."
The separation will enable FIS to target a "strong investment-grade" rating, while allowing Worldpay to invest more aggressively for growth, Ferris said, adding this approach will position both sides of the company to pursue strategic goals. For FIS, that means a renewed focus on bank technology and the company's capital markets business. And for Worldpay, that means fast growth in new markets, payments technology and omnichannel commerce through internal development and acquisition.
"We're focused on getting this spinoff out as soon as possible and get these guys out and focused on M&A," Ferris said, while not providing further details, saying that would be the responsibility of Drucker and his team.
While the U.S. is FIS's largest market, it's mature and fiercely competitive, said Eric Grover, a principal at Intrepid Ventures.
"To buoy long-term growth, most processors need to build business in higher-growth markets abroad," Grover said. "It's much easier for a merchant acquirer and processor to penetrate and develop overseas markets than it is for a core bank processor, a debit or electronic bill payment-presentment network, or even an issuer-processor."
Ferris, who had been president of FIS,
FIS
"The FIS-Worldpay merger was pitched as a deal with historic potential. Unfortunately much of that potential was unfounded, resulting in massive distractions for both organizations," said Jordan McKee, director of the Fintech Research & Advisory Practice at 451 Research and S&P Global Market Intelligence.
On Monday, Ferris said the loss of synergies between the two companies following the split would be manageable.
"The breakup comes at a time when being lean and focused is fashionable in the eyes of Wall Street," McKee said. "But as they say, breaking up is hard to do. Untangling several years of integrations between multibillion-dollar organizations will entail hurdles, resulting in new distractions at a time when focus is more critical than ever."
FIS's 2019 Worldpay deal was part of a string of three large payment-bank technology mergers that were announced within a few months of one another. The others were
The combinations were designed to sell bank and merchant technology from a single source as both industries embraced automation.
It was also an attempt to ward off companies like Stripe, Square and PayPal that were developing technology while offering merchant credit based on future payment flows. The payment technology firms often had existing relationships with merchants that allowed easier underwriting for short-term credit.
"Fiserv and Global Payments executives are no doubt watching this [FIS] breakup closely," McKee said. "If Wall Street rewards these efforts, pressure and scrutiny on the previous megamergers in payments will undoubtedly increase."
