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Morningstar | Fiserv's Roadmap for Synergies Entails a High Degree of Difficulty

We believe wide-moat-rated Fiserv will continue to prosper as a result of its embedded relationship with community banks and credit unions. However, we are skeptical of the company's $41.8 billion merger with First Data. We don't see the logic in marrying a core processor and provider of electronic payments with a merchant acquirer. Throughout both their businesses, the only overlap we see is in issuer services which account for about 20% of the First Data’s revenue. We think over the long term integrating these two companies will prove challenging though we acknowledge in the short run there may be low hanging fruit in the form of cost redundancies. Over the long run, this deal's success will be determined by the company's ability to introduce new products. We do see some hope for cross-selling of fraud prevention offerings, but this is not enough to justify the deal. We encourage investors to read First Data's proxy statements that disclose executive officers saw declining compensation in each of the last two years. Despite hitting sales objectives, First Data missed the board's EBITDA and margin objectives. To us, this may suggest that Fiserv could encounter similar difficulties as its seeks to realize cost synergies. First Data has already undergone a significant restructuring effort to restore its profitability, and it is doubtful to us the company will be able squeeze out substantially more cost savings.Finally, we are concerned about Fiserv’s technology infrastructure which includes over 100 data centers. In comparison, smaller and leaner rival Jack Henry operates only four data centers. Given this, we believe Fiserv is facing cost pressures and absent the First Data deal would struggle to grow margins and sustain its 30-plus-year streak of achieving double-digit earnings growth. In addition, over the next five years, we are concerned that as banks increasingly differentiate themselves through technology, they will be motivated to update their core processing systems, which will dilute Fiserv’s switching costs advantage. That said, this will take time and Fiserv should be able to address these issues with added investment.