Today's news is also having a ripple effect across the payment processing industry. PayPal’s (PYPL) stock launched sharply higher to new all-time highs right after the opening bell, though it has since cooled off and is now about unchanged on the session. Other main competitors of WP include Square (SQ) and Fiserv (FISV), and both of those stocks are currently trading lower.
One would imagine that a mega-merger like this would be supportive for the sector overall, pushing stock valuations higher. But perhaps from a competitive point of view, investors are looking at FIS' new strong market position as a negative for others in the space.
Looking at the mechanics of the deal, WP shareholders will receive 0.9287 FIS shares and $11.00 in cash for each share of WP. As a result of the merger, FIS shareholders will own approximately 53% of the combined company while WP shareholders will own the remaining 47%.
The combined company will have approximately $12.3 bln pro forma 2018 annual revenue, and the companies anticipate $500 mln of revenue synergies, $400 mln of run-rate expense synergies, and nearly $4.5 bln of free cash flow in three years.
Shares of FIS jumped higher at the open, up about 3%, but have pulled back since. While the merger makes strategic sense, one possible sticking point for investors is that FIS will be assuming WP's debt load, which is very considerable at about $7.2 bln. FIS already holds a hefty debt total of its own -- $8.67 bln as of December 31, 2018.
FIS and WP are both participants in the payment processing industry, but they focus on different areas. Specifically, FIS is a developer of software that underlies payments for retail and banking. WP, meanwhile, is one of the world's largest merchant acquirers, processing credit or debit card transactions on behalf of businesses. For some context regarding its scale, it processes a staggering 40 bln transactions annually in more than 120 currencies.
The combination of the two companies creates a highly complementary business that greatly expands the capabilities and footprint for each. The payment processing industry is an ongoing battle for market share. Strategic mergers and acquisitions have become a major component of this battle as companies look to leap-frog ahead of each other. For perspective, according to Dealogic, in the first half of 2018 there were 102 transactions in this space for a total of $46 bln.
WP itself is no stranger to M&A as the U.K. company merged with U.S. payment processing company Vantiv in January 2018. The combined company, which took the name of Worldpay, immediately became a leading global eCommerce payments platform.
Prior to this WP/FIS deal, the largest merger in the space was Fiserv’s purchase of First Data Corp. for $22 bln this past January. PayPal has been very active too, making four acquisitions last summer, including its $2.2 bln deal for iZettle.
The rationale for the flurry of deals in the space is simple: consumers’ purchasing and shopping behaviors are rapidly evolving towards online and digital channels. Furthermore, as FIS' CEO stated in the press release this morning, "Scale matters in this rapidly changing industry." From a merchant's perspective, having all payment processing needs met by a single provider is key as it simplifies the eCommerce process.
The payment processing component of eCommerce, though, is highly-commoditized and fragmented, with firms competing mainly on fees. In turn, it then becomes a market share game with providers looking to grab a larger piece of the pie -- oftentimes through acquisitions.