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Rishi Taparia - Issue #77

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This week we look at the monster merger between Fiserv and First Data, Home Depot's effort to create
 

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January 20 · Issue #77 · View online
Links and posts largely on what I find interesting or compelled to write about. Expect a lot of fintech, commerce and tech related posts, but I promise there will be hodgepodge of random tidbits as well!

This week we look at the monster merger between Fiserv and First Data, Home Depot’s effort to create a single customer experience, Visa and Mastercard given the cold shoulder by the Chinese Central Bank, China’s scientific superpower ambitions, Bill Gates on the best investment he’s ever made and more. Enjoy!

Starting with...
fiserData: A behemoth is born, but is it enough?
This week a financial powerhouse was born as Fiserv agreed to buy First Data for $22 billion in an all stock deal. The news comes as a surprise for many in an industry that doesn’t see transactions of this size very often. The combined company (which will go by Fiserv in a tragic waste of an opportunity to rebrand) forges a mammoth technology vendor attempting to prove that despite all the noise around young tech companies like Square and Stripe, old dogs can also learn new tricks. The big question is whether it is too little too late.
Talk about missed rebranding opportunity.
Talk about missed rebranding opportunity.
The clear winner in the near term is Fiserv. A major technology vendor on the issuing and payments side, underlying 140 million checking accounts and over 30 billion digital payment transactions, Fiserv is cannonballing into merchant acquiring on global scale. With pro forma revenue over double that of their biggest competitor FIS, Fiserv also now has access to the 4,000 First Data customers, mostly the long tail of banks and small financial institutions current outside of Fiserv’s core customer base, to sell to and pull away even further. The deal provides a clear path for international expansion, near term revenue growth and higher EBITDA which the Street will reward them for.
For First Data this is a capitulatory move, submitting to the very real challenges of running an acquiring business that is becoming increasingly commoditized. Saddled with debt after getting taken out by KKR over a decade ago, the stock gained under 10% in the more than three years since the IPO in 2015 despite the company being the largest global merchant acquirer, processing over 93 billion transactions annually. With First Data still the largest investment on KKRs balance sheet (the PE firm still maintained a 39% stake in the business post IPO), they finally seem to have agreed that the best path forward is within another organization — the end of a rocky journey that included numerous acquisitions in an effort to further innovate on top of a monster acquiring business. KKR will own 19% of the combined business.
Not a whole lot of movement for FDC. Source: Google Finance.
Not a whole lot of movement for FDC. Source: Google Finance.
The short term challenge for Fiserv is now making sure this cannonball doesn’t turn into a belly flop. Integrating the two businesses — a combined 48,000 employees with very distinct cultures and skeletons — is an undertaking of massive proportion that will certainly be a major distraction and likely throw a wrench into any previously planned 2019 initiatives. 
Following integration, the next and more important challenge will be product development. Tech first players like SquareStripeAdyenAnt Financial and Tencent have fundamentally changed the financial services landscape, making good design and user-first product experiences table stakes. Despite processing a fraction of the amount of First Data and making less than 30% of the revenue of Fiserv, Square’s market cap was over 40% higher than First Data’s and only slightly less than Fiserv’s prior to the merger announcement. Stripe’s most recent valuation puts them just shy of where First Data is trading, and that’s despite having leveraged FDCs infrastructure for the majority of their time as a company! The market (both customers and investors) now demand continued innovationleading from the front instead of attempting to follow fast which is the safe zone for banks. Focusing on product is going to be key to long term survival and attracting investors. To their credit, Fiserv announced they are going to be investing $500 million for incremental innovation. However, based on its current allocation —technology like digital enablement, next generation merchant solutions, advanced risk management, data focused solutions and ecommerce — I doubt $500 million is going to be enough.
As for the rest of the market this should serve as a warning — time to go big or go home. FIS is surely paying attention and likely contemplating a move of their own. Based on the common path legacy businesses have been taking — acquiring assets that help support the existing base instead of new market development — an acquisition of TSYS or even Worldpay by FIS is not out of the question. Not the move that’s going to be viewed as a real difference maker 10 years from now (better off trying to go buy Adyen or Stripe) but better than nothing I guess.
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This post was originally shared on Medium.
Commerce
Home Depot Is Rehabbing The Shopper Experience. Can Other Retailers Do The Same?
In New York, a Glitzy New Mall Devotes a Floor to Online Retailers
7 cool tech innovations from NRF
FinTech
Visa and Mastercard left out in cold as Chinese Central Bank refuses to process application
Fed Says Student Debt Has Hurt the U.S. Housing Market
Kabbage Now Powering "Pay Later" Financing for Alibaba.com U.S. Customers
Technology
Can China become a scientific superpower? - The great experiment
‘They Own the System’: Amazon Rewrites Book Industry by Marching Into Publishing
Netflix is finally sharing (some of) its audience numbers for its TV shows and movies. Some of them are huge.
Random Tidbits
Virginia Woolf? Snob! Richard Wright? Sexist! Dostoyevsky? Anti-Semite!
Bill Gates: The Best Investment I’ve Ever Made
New App Helps People Remember Faces
Quote I’m thinking about: “The more scared we are of a work or calling, the more sure we can be that we have to do it.” - Steven Pressfield, The War of Art
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