Business Strategy & Outlook:
Fidelity National Information Services’ acquisition of Worldpay in 2019 was one of three similar deals that took place in short order. It is not believed that the move was especially attractive relative to the other two, and not believed the company materially strengthened its competitive position as a result. However, it is thought there is a valid strategic rationale for these deals, and the introduction of Worldpay’s acquiring business should boost overall long-term growth, given the ongoing shift toward electronic payments. The integration of Worldpay seems to have been completed without any major hiccups, with the company achieving its stated cost synergy targets. However, the COVID-19 pandemic illustrated one negative of the merger, in that the acquiring business is significantly more macro-sensitive than FIS’ legacy operations. Although cost synergies from the acquisition appear to have helped the company maintain its margins, the pandemic resulted in a modest organic revenue decline in 2020. But results from FIS and peers suggest payment volume has steadily improved and has bounced back fairly quickly, as the long-term secular tailwind appears to be reasserting itself and the worst seem to be past the industry. That said, if the economic environment takes a sharp negative turn, new headwinds could appear in the near term. Moreover, FIS’ performance has lagged peers a bit, suggesting the company may need to make some changes and increase investment to get back on track. From a long-term perspective, the pandemic could benefit the industry, as it appears to have accelerated consumers’ shift away from cash. Additionally, it may be plausible that a part of the rationale for the acquisition was to strengthen the company’s position in online payments. This area has become too large to ignore, and the pandemic has only reinforced the importance of capabilities in this area. Overall, while the company’s near term issues are recognized, the long-term picture of FIS looks good. The company’s segments could all be characterized as industry leaders with attractive margins and fairly stable revenue, and limited capital needs should allow FIS to generate strong free cash flow.
Risk and Uncertainty:
Any weaknesses in the banking sector could lead banks to defer technology purchases, hurting FIS’ top line, and any dramatic changes in the structure of the banking industry could have hard-to-predict consequences for FIS. Aging core processing systems and increased needs for system flexibility could lead to higher replacement rates and erode the company’s moat. The payment processing industry is evolving, and while the position of the acquirers within the current dominant framework is well established, disruption could lessen the profitability the industry can generate or cut the acquirers out altogether. As the company’s revenue is directly tied to revenue at its merchant customers, FIS’ acquiring operations are sensitive to macroeconomic conditions. It is seen that the company’s largest environmental, social, and governance risk as data security. Historically, the industry has experienced significant system breaches at times, which creates event risk. The risk of breaches is likely higher on the acquiring side, but a breach on the bank technology side could have greater consequences. Finally, management has historically been aggressive when it comes to mergers and acquisitions, which can lead to integration risk and high financial leverage at certain points.
Bulls Say:
- The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts.
- The shift toward electronic payments will continue to create room for acquirers to see strong growth without stealing share from each other.
- With healthy operating margins and limited reinvestment needs, FIS throws off a good amount of free cash flow and actively returns it to shareholders
Company Description:
Fidelity National Information Services’ legacy operations provide core and payment processing services to banks, but its business has expanded over time. By acquiring Sungard in 2015, the company now provides recordkeeping and other services to investment firms. With the acquisition of Worldpay in 2019, FIS now provides payment processing services for merchants and holds leading positions in the United States and United Kingdom. About a fourth of revenue is generated outside North America.
(Source: Morningstar)
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