Metavante's Risky Jump Into EFT's Big Leagues

  Personal identification number-based debit is hot, and Metavante Corp. is trying to stake out its territory in the market through its proposed purchase of Montvale, N.J.-based NYCE Corp., owner of the nation's second-largest PIN-based electronic funds transfer network.
  With the acquisition, Metavante hopes to grow the NYCE network's current client base of 1,200 financial institutions as well as capitalize on consumers' growing use of PIN-based debit cards at the point of sale. But Metavante also is taking a risk. The transaction processor and automated teller machine driver for financial institutions is paying a high price-about 17.5 times NYCE's annual earnings-for a network that could see some or its members defecting to competitors, including Visa USA and Greenwood Village, Colo.-based First Data Corp., from which Metavante hopes to buy NYCE.
  "Customer attrition is a risk factor, especially considering First Data will now be a direct competitor of NYCE," states an analysis of the proposed acquisition by the New York-based Gimme Credit corporate-bond research firm.
  Metavante is offering $610 million for NYCE. First Data must sell its 64% share in NYCE through an agreement reached with the U.S. Department of Justice for antitrust clearance so it could buy Concord EFS Inc. and Concord's Star EFT network. Star is the nation's largest PIN-based debit network. The First Data/Concord deal closed in February.
  Under Metavante's offer, First Data would get $389 million in cash; minority shareholders would get the rest. NYCE's other shareholders include the network's largest issuers-Citigroup Inc., J.P. Morgan Chase & Co., HSBC Holdings PLC and Bank of America Corp., which acquired its network stake when it purchased FleetBoston Financial Corp.
  The shareholders had 30 days from the May 17 acquisition announcement to decide whether to agree to the terms or buy NYCE themselves. (The banks hadn't made an announcement as CCM went to press). Metavante, though, expects to secure approval from NYCE's minority shareholders and hopes the deal can close this month.
  "Our relationship with these guys is very good," says Frank D'Angelo, Metavante executive vice president.
  In addition, the Justice Department must approve Metavante as a buyer. A DOJ spokesperson would only say that the department is aware of the details of the proposed deal and will act soon. Antitrust attorneys for the department have indicated that any buyer of NYCE must be able to compete with First Data and Star in the PIN-debit space.
  Metavante is a leading processor of PIN-based debit transactions and a top-10 driver of ATMs owned by financial institutions. Its purchase of NYCE would boost its share in those two markets. When it acquired Star, First Data became the nation's top ATM driver and the top acquirer of PIN debit transactions.
  Metavante's owner, Milwaukee-based bank holding company Marshall & Ilsley Corp., would take on considerable debt to buy NYCE. The Gimme Credit report says that virtually all of the $610 million would be private debt, which lessens the amount of capital available for marketing.
  Moreover, Metavante, in building a broader payments business for financial-institution clients, recently bought Advanced Financial Solutions Inc., which owns the Endpoint Exchange check-imaging network, and Kirchman Corp., a supplier of bank transaction-processing software. The acquisitions total nearly $1 billion, much of which M&I must carry in private debt, according to Gimme Credit. But Metavante Chief Executive Frank R. Martire recently told analysts that the acquisitions would position the company as a leading payment services provider for financial institutions in growing transaction markets.
  'Very Focused'
  First Data, meanwhile, is relatively flush with cash. Besides the money it would get for NYCE, First Data received $436 million when it recently sold Las Vegas-based Global Cash Access, the nation's largest ATM owner/operator and card processor for casinos. First Data's $7 billion acquisition of Concord was a stock deal.
  NYCE in 2003 produced a healthy $35 million in net income on revenues of $143 million. The Gimme Credit report, though, suggests the Metavante deal is somewhat risky because of the possibility NYCE could face member-issuer defections.
  Another analyst, Gwenn Bezard of Celent Communications Inc., a Boston-based consultancy, is skeptical NYCE would be able to maintain all of its card-issuer base given the competition First Data is getting from Visa and its Interlink PIN-based point-of-sale debit network, and from First Data's drive to stop the hemorrhaging of Star, which has lost several top-10 issuers in the past year.
  Among the Star defectors are Wells Fargo & Co. and Wachovia Bank, both of which jumped to Interlink last year. As a result of the lost contracts, First Data is expecting Star to lose $35 million in revenue this year, according to a recent First Data financial report.
  "The thing I am concerned with is we are seeing the big banks going to Visa," says Bezard. "And I think First Data is very focused on Star."
  Since First Data gained control of Star, however, the network has renewed contracts with several mid-sized debit card issuers and ATM owners, including Cleveland-based KeyCorp and Los Angeles-based Union Bank of California.
  Bezard predicts that First Data and Visa will be going after NYCE member-issuers. A test of NYCE's ability to compete for major card issuers may come soon when New York-based J.P. Morgan, a major NYCE issuer, acquires Chicago-based Bank One Corp., a big Star issuer.
  Shareholders of both banking companies approved the merger in May; all that remains for the union are various regulatory approvals, which the firms expect at mid-year. Before that deal was announced, Bank One was widely rumored to have decided to drop Star.
  Metavante's D'Angelo agrees that NYCE's growth in recent months has been adversely affected by the distraction of First Data buying Concord and First Data's primary concern with shoring up Star.
  But he says Metavante will hit the ground running to promote NYCE among its clients, many of whom do not currently use NYCE as a debit switch.