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Morningstar | Bank Tech M&A: Slowing Growth at Fiserv and FIS Leads to Value-Destructive Acquisitions

After a comprehensive review of the Fiserv-First Data and Fidelity National Information Services-Worldpay mergers, we believe these deals are value-destructive. We have downgraded Fiserv’s moat rating to narrow from wide and assigned it a negative moat trend rating. Though we view First Data’s competitive positioning favorably and believe it has a moat, we believe the economics of merchant acquiring are dilutive to Fiserv’s wide moat in core processing. Had Fiserv not acquired First Data, we would probably still assess it as having a wide moat. We also decreased our fair value estimate for Fiserv to $74 per share from $77.

Though we regard FIS as the most overvalued name in the space, we are increasing our fair value estimate to $79 per share from $68. After reviewing our cost of capital assumptions for the industry, we decided to lower Fidelity’s cost of equity to 7.5% from 9%. Nevertheless, we still view Fidelity’s purchase of Worldpay as value destructive.

Finally, throughout our research into these deals we became increasingly impressed by rival Jack Henry, which has largely refrained from big acquisitions. Our dive into the industry’s cost structure suggests that the company’s margins will continue to rise. We regard these gains as sustainable and have increased our fair value estimate to $127 per share from $107.

We detail all of our key findings in our new Select piece, "Bank Tech M&A: Growth at the Cost of Value Destruction." Though we raised our Fidelity fair value estimate, this is entirely related to a lower cost of capital assumption in line with the rest of the industry. We still believe the Worldpay acquisition is value-destructive and regard FIS as the most overvalued name in the space. Our fair value estimate implies that shares in Fidelity are approximately 40% overvalued; in our minds, that makes a potential short candidate. We expect the company’s true cash earnings will differ significantly from its adjusted earnings metrics.

We think Fiserv’s competitive positioning doesn’t benefit from the addition of First Data. While we regard the merchant acquiring industry favorably and do believe it is moaty, Fiserv’s shareholders will own a company with a weaker moat once the deal is completed. In addition, our review of Fiserv’s cost structure leaves us increasingly concerned that the company will need to address its aging infrastructure, which should pressure margins. This has led us to lower our moat trend rating to negative. Overall, we believe the company's $900 million cost synergy target is aggressive, and we struggle to find new products and cross-selling opportunities that will lead to $500 million in revenue synergies.