In most of our monthly M&A articles, we would look at companies coming together to bring in additional capabilities, accelerate market expansion or support other strategic rationales for making acquisitions or investments. But this month, we are looking at a divestment, a spin-off to be precise, that has caught the eye of many payment experts – the divorce of FIS and Worldpay.
For those of us that have been in the payments industry for long enough, this announcement only marks the latest stage of Worldpay ownership. Let’s do a quick whistle-stop tour to remind ourselves:
• Worldpay was founded in the UK in 1997 in response to some of the challenges faced by an e-commerce merchant (if memory serves us correctly, it was a wine retailer) to sell online in different currencies
• After an initial investment from NatWest bank in 2000, and the subsequent takeover of NatWest by Royal Bank of Scotland, RBS took full ownership of Worldpay and combined with Streamline (the in-house POS acquirer) to create a merchant acquiring business that could support both offline and online sales channels
• Over the coming years, RBS pursued an ambition to become one of the leading global banks with a sizeable investment banking division. Whilst Worldpay was a good and revenue-generating business line, it arguably did not receive the internal focus it deserved
• As a result of the financial crisis in 2008/09, RBS had to be bailed out by the government and the divestment of Worldpay was one condition imposed onto the bank; private equity houses Advent and Bain took an 80% stake in 2010 (valued at approx. £2bn)
• In 2015, Advent and Bain sold approx. 60% of the business through an IPO, and Worldpay was listed on the London Stock Exchange at a valuation of £4.8bn
• Partly to fulfil its more global aspirations, Worldpay merged with US-based Vantiv in 2017, de-listed from the LSE with the combined entity newly listed in New York instead; Vantiv valued Worldpay at approx. £8bn and the newly combined entity was valued at £22bn
• And finally, in 2019, Worldpay agreed to merge with FIS, a global provider of payment processing technology. FIS would own 53% of the combined business and it valued Worldpay at $43bn
From a merchant acquiring perspective, the main rationale for the FIS deal was two-fold. First, it was assumed that global expansion for Worldpay would accelerate, as FIS had a strong market presence in places such as Brazil and India where Worldpay was still weak at the time. Second, it was assumed that FIS relationships with financial institutions would provide a cross-sell opportunity to the acquiring business.
Fast forward to February 2023, when FIS announced that the deal would be undone again. What could have driven this decision by FIS?
Pre-merger in 2018, FIS’ merchant solutions business contributed $208m, or 2.5% of the total, in revenues. By 2022, largely driven by the Worldpay integration, merchant solutions generated $4.77bn, or 32.8% of FIS revenues. In other words, it had become an important business unit within FIS.
Worldpay did not just add revenues to FIS’s bottom line but ‘good’ revenues too. Since the acquisition of Worldpay in 2019, the EBITDA margin of the merchant solutions business consistently exceeded the margins generated in the other two of FIS’ main business lines – banking solutions and corporate markets solutions – and helped push the EBITDA margin up for the whole of FIS. It is also worth noting that achieving an EBITDA margin of approx. 50% in an acquiring business is not bad at all.
At a quick glance, the merger does appear to have added some financial value to FIS in the short-term (PS: we do recognize that this is a revenue perspective and does not consider the significant integration costs that would have been incurred). But looking more closely at recent performances, the picture gets a bit shakier. Over the last 12 months, the merchant solutions unit has grown its revenues only by 6% and its processed volume by 5% (to approx. $2.2trn). Adyen, which processes about a quarter of that, has grown volumes by well over 50% and, according to a “The Business of Payments blog”, JP Morgan has grown volumes by 14% – bringing it close to overtaking Worldpay as the largest acquirer in the world. In other words, the merchant solutions (i.e. Worldpay) business has started to slow down considerably.
In its 2019 Annual Report, FIS stated a number of business risks associated with the merger and very high on that list was the statement “FIS may be unable to integrate the business of Worldpay successfully or realize the anticipated benefits of the acquisition”. More specifically, it refers to “the inability to successfully combine the business of Worldpay in a manner that permits FIS to achieve, on a timely basis, or at all, the enhanced revenue opportunities and cost savings and other benefits anticipated to result from the acquisition.”
The truth is that the anticipated cross-sell opportunity of services within the FIS portfolio has not materialized. As for the cost synergies, there are plenty of examples when the combination of issuer and acquirer processing provides scale economies and can be an attractive proposition to banks playing on both sides of the payment ecosystem. But when you are running a complete acquiring business that is less the case.
Offering payment acceptance solutions across multiple channels today is not only a question of scale economies and low processing costs. What used to be incremental value-added services (e.g. automated chargeback management or Dynamic Currency Conversion) have become table stakes and need to be offered by any respectable acquirer today. Newer players, and we will include Adyen in here, have changed the industry and changed the expectation levels from the end consumer, i.e. the merchant, considerably and irreversibly. Best-in-class technology, agility in processes and continuous investment in products and capabilities are becoming a norm. Standing still is not sufficient.
When the FIS CEO Stephanie Ferris states that the spin-off is needed as it will “allow Worldpay to invest more aggressively for growth” it only highlights the value of a stand-alone merchant acquiring business that needs to keep investing in order to be capable of addressing market needs. The spin-off decision clearly suggests that the appetite for continuous investment into the merchant solutions / Worldpay business just isn’t there.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).