New management at FIS is moving quickly to repair the damage done by the company’s botched takeover of Worldpay in 2019. Stephanie Ferris, the incoming CEO, announced that Worldpay would be demerged this year with a separate listing on the stock market. She also booked an associated $17.7bn write down of the $43bn purchase.
Although the FIS board has been under pressure from activist investors, Ferris was Worldpay’s CFO prior to its acquisition by FIS and then worked as COO at FIS overseeing the merger integration. She probably came to her own realisation that Gary Norcross, her predecessor as CEO, had got the strategy badly wrong.
So, why is FIS demerging a business it only acquired three years ago? Well, the strategic rationale slide from the last week’s results deck won’t enlighten you much. I’m baffled investors put up with such flimsy written material.
The investor call itself supplied a little more detail. Stephanie Ferris said that capital allocation is driving the decision. Worldpay is stagnating and needs access to investment dollars to make the acquisitions it needs to keep up with Stripe, Adyen and JP Morgan. Ferris believes the current ownership, with its conservative balance sheet, cannot provide the capital needed to generate growth. She explained “specifically, the separation will enable FIS to target a strong investment grade credit rating, while allowing Worldpay to invest more aggressively for growth.”
Ferris was clear that Worldpay’s recent poor performance has been, in part, due to key product gaps and that FIS’s cautious capital structure had stymied its ability to buy-in or build capability. As an independent business, Worldpay will be able to raise the money it needs. In contrast, once free of its troublesome merchant acquirer, the rump FIS promises to be an investment grade stock paying steady dividends once more.
Shareholders did not welcome the move. Shares fell sharply on the news but no analyst on the investor call asked about the write down. Why $17.7bn? What went wrong? How is Fiserv, FIS’s arch-rival, seemingly make the exact same strategy work? FIS shares trade at less than half their value before Worldpay joined its family. Nobody apologised to shareholders for this value destruction.
It’s worth looking at why FIS bought Worldpay in the first place but before examining the deal rationale, let’s look at the history. Fifth Third Bank Corp span out its merchant processing division in 2009 with the help of Advent. This business was renamed Vantiv and bought London-based Worldpay for $10.4bn in 2017 bringing “together global scale, integrated technology, and diverse distribution to create a market leader in payment technology to power omni-commerce.”
Worldpay itself had been spun out of Royal Bank of Scotland with investment from Advent and Bain. Although Vantiv was the bigger partner and the HQ was to be in the US, the combined company chose to call itself Worldpay, which is a fine name for a payment brand. The combined business was valued at $28.8bn.
Less than two years later, FIS made its move and paid $43bn (including $8bn debt) for new Worldpay. As a rather staid provider of software and services to banks, FIS was feeling left out of the Fintech boom. Many commentators felt the Worldpay acquisition gave FIS a growth story. “The global payments industry is moving at an accelerated speed, and it is vital that large providers such as FIS stay ahead,” said Rivka Gewirtz Little of IDC Financial Insights.
The 2019 deal rationale was based mainly on revenue synergies from cross-selling merchant acquiring to FIS’s bank customers although management also believed that FIS products would be interesting to Worldpay’s merchants. The four main revenue drivers were expected to be:
- Helping Worldpay to expand into emerging markets where FIS has a large footprint such as Brazil and India
- Faster growth in eCommerce “through Worldpay’s expertise and ability to accept hundreds of payment types and currencies and FIS’ reach.”
- Leveraging FIS’ leadership in the issuing market to offer loyalty programmes to Worldpay’s merchant customers
- Using FIS’ expertise in open banking APIs to extend Worldpay’s acceptance offer beyond cards and wallets
None of these worked out. Cross-selling is always hard. Cross-selling anything to banks is even harder. Despite its heritage, Worldpay was never set up to partner with banks, the way that Global Payments, Worldline or First Data is organised. FIS didn’t pick up any new bank partnerships for Worldpay. In fact, it contrived to lose its main UK bank relationship when Natwest launched Tyl.
Integrating the two businesses, overseen by Stephanie Ferris in her role as FIS COO, took longer and was more expensive than hoped. Three years after the merger, the costs are still racking up. FIS charged $950m in 2022 “primarily to acquisition and integration costs primarily related to the Worldpay acquisition.”
Fast forward to 2022 and FIS management is now excited to say that the spin-off will create two market leaders – FIS as supplier of technology to banks and other financial institutions and Worldpay as the world’s largest global acquirer. At least for the moment. Worldpay’s FY 2022 volume was $2.2 trillion. JP Morgan, which grew 14% in 2022, is snapping at its heals and will likely be number one in 2023.
Management says the priorities for the newly independent Worldpay will be expanding in eCommerce (new geographies and “’payment optimisation”), strengthening its enterprise offerings including omni-channel and transforming SMB towards providing embedded finance working with ISVs. The latter is a recognition that its legacy ISO and direct SMB customers on both sides of the Atlantic are under sustained attack.
Charles Drucker, Worldpay’s CEO in 2019, returns to lead the business. He will need to quickly stabilise the poor financial performance which triggered the demerger. Although Worldpay was supposed to be the growth engine that transformed FIS’s fortunes, sales actually fell in Q4 2022, by 1% to $1.178b. Within Worldpay, a positive Q4 result from Global eCommerce, about 30% of revenue, was offset by continued sales declines in Enterprise (which includes the UK) and SMB. Erik Hoag, CFO, spelled out the problem: “These trends in SMB reflect a lack of new product investment, which we believe the [demerger] will best enable us to remedy. And in Enterprise, we saw economic weakness in the UK and anticipate further deterioration this year.”
Worldpay revenues are expected to decline a further 2%-4% in 2023 although I expect new management is assertively managing expectations. These numbers are likely to be very much a worst case scenario but it’s going to be hard for strong growth in Global eCommerce to overcome continued weakness in Enterprise (notably in the UK) and SMB.
FIS will soon be publishing more detail on Worldpay’s financial situation and market positions. It’s going to be fascinating to see how, as an independent business, it plans to invest to win in what is becoming a very competitive market.
[…] spelled out earlier this year when FIS took an $18bn write down on its acquisition of Worldpay. We covered this in detail at the time. Now, Worldpay is to be spun-out of FIS as a joint-venture with GTCR, a Chicago private equity […]