Holy Mother of Screaming Metavante, GonzoBankers, who’d have guessed Milwaukee would become the bill pay capital of the U.S.?! You read the news, I know – Fiserv announced the purchase of bill pay giant CheckFree two weeks ago for $4.4 billion. Damn right – beer and bill pay both stomping terra, Milwaukee style.
I like the deal from a strategic perspective. Fiserv could use a credible, high-end Internet banking product with an integrated bill pay solution, which it will get via Corillian/CheckFree. Fiserv’s high end commercial cash management products could also benefit from CheckFree’s powerful payment modules. While I don’t see CheckFree opening many doors for Fiserv at the big banks, Fiserv can definitely move some CheckFree product through its thousands of financial institution clients.
But, man, $4.4 billion?! This is what we call a Big Ticket Item in the industry. And this was a cash deal – $4.4 billion – cash money! Everyone with whom I’ve discussed this deal has said that it MUST be a stock deal. But, no – this was a cash deal. Probably funded by debt, but a cash deal nonetheless.
Just to put this transaction in perspective, the $4.4 billion/$48 per share deal represents:
I like those numbers if I’m a CheckFree stockholder. Not so sure how much love I’m feeling if I’m a Fiserv stockholder. I have read roughly 600 analyst reports on this transaction – all written by smart analysts – and they all like the deal for Fiserv. They say that the EBITDA premium mentioned above pales compared to the 20X CheckFree paid for Corillian and 15X Intuit paid for Digital Insight. I see the logic, but I don’t necessarily buy the “It’s not as much as those other guys paid” mentality. Fiserv paid a pretty hefty premium for a company that realized strong (11%) revenue growth in FY 2007 but also realized a 2% decline in profits.
The Fiserv press release came right out and said that they expect to realize “$100 million in annualized cost savings and more than $125 million in annualized revenue synergies.” Fiserv does not exactly have a storied reputation of actually realizing predicted cost savings with its acquisitions. But still, the analysts say, CheckFree is growing faster than Fiserv, so the revenue boost could well be there.
I’m clearly not as high on bill pay vendors as the analyst community. When I think bill pay vendors, I think of end user implementation rates that will definitely keep rising, but per unit rates that are bound to nosedive as more and more banks and credit unions – large and small – decide to take bill payment or components thereof in house. I think of an industry under fairly intense pressure from clients to cut its per unit pricing.
When I consider CheckFree in particular, I think of a company that (analysts say) attributes as much as 20% of its roughly $1B in revenues to Bank of America. I’d personally put BofA near the top of my list of candidates to take a large chunk of bill pay in-house sooner rather than later. Hmmmm… the loss of one seemingly volatile client could negate nearly all of Fiserv’s projected cost and revenue synergies for this deal. And from our Much Freakin’ Easier Said Than Done files… one analyst even said that CheckFree could make up for the prospective loss of BofA revenue with new client sales. Is that the same revenue growth that was supposed to support the transaction price of this deal in the first place – growth of a revenue base that included BofA revenue?
But still, even though $4.4 billion feels rich to me, I’m willing to skip the vehement debate with the more optimistic analysts on this one. After all, stock analysts have no skin in this game…… right?
However, one issue that has gotten virtually no coverage is that consolidation is increasingly forcing companies into doing business with their competition. I covered this topic pretty extensively in a recent article addressing the CheckFree/Corillian deal.
Think of this deal in particular. With Fiserv about to own CheckFree and Corillian:
Fiserv CEO and President Jeff Yabuki is quoted by Steve Bills in the 8/3/07 American Banker as saying, “You have to be able to cooperate while you’re competing.” He described it as “coopetition.” Coopetition – not a new term, of course, but how thoroughly Seussian! I picture a Lorax thumping his competitor with a sledgehammer in one hand and icing the bruise with the other.
Coopetition. Let me shed a little light on the reality of coopetition. Vendor A sometimes will coopitate with Vendor B, but it is almost always the result of Vendor B acquiring a formerly independent business partner of Vendor A. Coopetition is rarely a product of the two competing vendors simply striking a partnership together. And these coopetitive arrangements tend to be short term – until core providers can strike arrangements with new business partners. I’m sure there were quite a few Fiserv clients utilizing Moneyline Express before rival Metavante acquired the bill pay player. However, I have not seen a Fiserv Internet banking proposal that included Metavante bill payment services in quite some time.
Coopetition is not inevitable in the long run; it’s a stop-gap until competitors can regroup and find another partner. Core and Internet providers will scramble to make sure they’re not coopitating with Fiserv any longer than they have to. In bill pay, a forced coopetitive environment with Fiserv will spawn opportunities for independent bill pay providers, new bill pay companies, or bill pay conglomerations run by big banks. That could erode the very revenue growth at CheckFree that has been so loudly hailed in the Fiserv acquisition.
From a strategic perspective, the Fiserv/CheckFree transaction is chock full o’ opportunity. It’s a potential powerhouse move that could be a functional boon for Fiserv’s customers. I’m not quite a cheerleader for the deal from a financial perspective because I am not as high on the financial future of bill pay providers as many. It’s not a terrifying deal, but I’m not jumping on the bandwagon.
The unspoken silver lining? This is a glowing chance for Fiserv to strut its Fiserv 2.0 stuff. Until now, the most tangible signs of Fiserv 2.0 have been a new org chart, a few new butts in the leather chairs, and consolidated purchasing (including travel) that takes the credit card points out of the hands of Fiserv’s MANY road warriors! With CheckFree, Fiserv has a chance to deploy a single ancillary product across many business units and a huge core base of banks and thrifts – a key component of Fiserv 2.0 as I understand it. This is a $4.4 billion chance for Fiserv to “set plans, stick to plans, and be accountable,” as Yabuki described Fiserv 2.0 in the company’s 9/16/06 Webcast. This is the most teed-up chance imaginable for Fiserv to disprove the cynics who say that rival Fiserv business units will never coopitate. For the sake of my many Fiserv clients, I truly hope Fiserv can do it.
Next time –
…think Cornerstone Advisors.
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