Morningstar | FIS Will Be Challenged for Organic Growth, Investors Should Expect Acquisitions
Fidelity National Information Services' near- and medium-term fortunes will rely on the company's ability to integrate its massive $9.1 billion acquisition of SunGard and capitalize on any cross-selling opportunities. We worry aggressive cost-cutting has impaired the value of SunGard's assets. In addition, we do not believe the company has been able to meaningfully realize significant revenue synergies. Over the long run, we expect Fidelity to prosper as a result of high customer switching costs and a captive client base. Though SunGard’s product offering represents a contiguous market for Fidelity, we are skeptical the company will realize many of the same cross-selling advantages it historically enjoyed. However, the company's recent performance suggests that SunGard is being integrated with minimal difficulty. At the August 2015 announcement of the acquisition, the Fidelity presented a combined company that in 2014 would have generated $9.2 billion in revenue, $2.8 billion in adjusted EBITDA, and by 2017 would realize more than $300 million run rate in cost synergies. We would point out that we have little faith in management’s adjusted EBITDA metric as it doesn’t directly measure our preferred approach, which is cash flows. Free cash flow has been meaningfully lower than EBITDA since the deal has closed, indicating the metric is of low quality, even if EBITDA has outperformed management’s original expectations.In our view, Fidelity has struggled to achieve minimal sales growth in GFS (the segment that houses SunGard). We suspect this is because Fidelity's cost-cutting has resulted in fewer new products. In addition, we view SunGard's end markets as challenged since asset managers are facing fee pressure. Fidelity's challenge now is to navigate a banking environment where consolidation persists while meeting bank's increasingly complex needs. We suspect that Fidelity will need to make additional acquisitions or increase its capital spending to launch new technology offerings for banks as well as improve its security offerings. We believe cyber security potentially represents a black swan risk for financial service providers.Fidelity National Information Services is a provider of technology solutions for merchants, banks, and capital markets firms globally. The company's solutions include merchant acquiring solutions; payment solutions; global eCommerce solutions; processing and ancillary applications solutions; digital solutions; fraud, risk management and compliance solutions; electronic funds transfer and network services solutions; card and retail payment solutions; wealth and retirement solutions; item processing and output services solutions; securities processing and finance solutions; global trading solutions; asset management and insurance solutions; and corporate liquidity solutions.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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