Last updated on December 3rd, 2019 at 11:41 am
Money makes the world go ’round. And Fiserv Inc. moves that money.
The Brookfield-based financial technology developer, which provides back-end processing for banks and credit unions, has quietly built itself into a global powerhouse and is poised to become the most valuable publicly-traded company in Wisconsin.
Fiserv was born out of an acquisition in 1984, and it has continued to grow by buying new technologies – about 180 small acquisitions over the past 35 years. But with its recent announcement that it would acquire New York City-based point-of-sale transaction giant First Data Corp., Fiserv made its biggest, boldest move by far.
The $22 billion all-stock deal, which is pending regulatory approval, would be the largest ever in the fintech industry, and create the No. 1 global card issuer and merchant processor. It would bring together two leading Fortune 500 firms with an expected $15 billion in annual revenue. Fiserv’s market capitalization would nearly double to about $60 billion.
“The number of acquisitions that I’ve done in my … 14 years here has slowed down dramatically, but the quantum is much larger. We’re looking to take fewer and larger steps. Ways to help our clients keep up and jump ahead of the change that’s going on in the market,” said Jeffery Yabuki, president and chief executive officer of Fiserv.
Integrating two giants
The First Data acquisition is expected to close in the second half of 2019, most likely in the third quarter. Yabuki declined to point to a more specific completion date.
More than one-third of U.S. banks and credit unions use Fiserv core account processing. The company processes more than $75 trillion per year.
First Data specializes in commerce-enabling technology for merchants, securing and processing more than 3,000 transactions per second worldwide. Its Clover point-of-sale platform is used on more than 1 million devices globally.
Combining the companies gives Fiserv an end-to-end solution in the payments space – from the point when the customer inserts the chip card in a terminal, to the backend processing of the transaction.
Fiserv will also be able to offer the Clover merchant system through its bank customers in a cross-selling opportunity, said David Koning, a senior research analyst at Milwaukee-based Robert W. Baird & Co. Inc. covering Fiserv.
And while the legacy Fiserv customers – financial institutions – are a loyal and reliable recurring revenue stream, the card transactions coming through Clover provide a fast-growing new segment, Koning said. As a result, Fiserv can up its earnings-per-share from 10 percent to 15 percent per year.
Terence Ow, associate professor of information technology in the management department at Marquette University, said the merger offers economies of scale, and the opportunity for Fiserv to enter a new market. It also smooths out the flow of the transaction from the moment a card is swiped to the moment the funds leave a bank account.
“If you can smooth out the flow, how much cost reduction will there be?” Ow asked.
While the transaction is massive, it will not likely have a long-term impact on the fintech industry, Koning said. The most serious impact will be the synergies gained via the combination – the cost savings from eliminating duplicative structures and employees, he said.
“You think about what typically happens in acquisitions. The management layer of the seller often gets displaced,” Koning said.
Fiserv has 24,000 employees worldwide, and First Data has 22,000 employees.
Because Fiserv is still in the planning phases of the companies’ integration, Yabuki declined to say how many employees will be eliminated in the transaction, or which offices may be closed. He also hasn’t guaranteed Fiserv will keep its headquarters in the Milwaukee area.
“The beauty of this transaction is there’s not that much crossover,” Yabuki said. “We like the fact that it doesn’t rough and tumble the whole company.”
He pointed out the $500 million of revenue synergies Fiserv plans to gain from the transaction, which it will reinvest in product innovation and growth acceleration.
But Fiserv is also expecting $900 million of cost savings over five years following the acquisition, “driven primarily by the elimination of duplicative corporate structures, streamlined technology infrastructure, increased operational efficiencies, process improvements and footprint optimization,” the company said when it announced the deal.
“It’s a normal part of putting things together,” Yabuki said. “We won’t need duplicative CRM systems and we won’t need separate ERP systems, so there’s a lot of systemic opportunity there. We believe that we’ll be a larger purchaser, we’ll be a much larger company, we’ll be able to get more out of how we manage and negotiate with our vendors. And in some situations, we’ll absolutely have duplicative headcount.”
The company has created an Office of Mobility to identify new positions for affected employees within the company, Yabuki said.
Ow said the layoffs may not be too drastic because the companies have been operating in different segments and didn’t have a lot of overlap on clients.
“Redundancy usually happens when both companies are competing on the same scale,” he said. “It’s like saying if Amazon does Amazon Prime, does that affect Amazon Marketplace or Amazon Web Services? It’s quite different.”
Yabuki will continue to lead the combined company as CEO and chairman of the board. Frank Bisignano, chairman and CEO of First Data, will become president and chief operating officer.
Bisignano declined to comment for this article.
Reconfiguring the business
Aside from the technical aspects of bringing the companies together, the less tangible aspects, such as culture, can be crucial in a merger.
Fiserv emphasized its newly revamped aspiration (to move money in a way that moves the world), purpose and values, which it has displayed on a prominent wall in its Brookfield headquarters. The company prizes striving for excellence, has an internal company pride campaign called “I am orange,” and encourages volunteerism via Fiserv Gives Back.
“But let’s remember that First Data’s been around for 50 years. They’re not a fly-by-night company,” Yabuki said. “Frank Bisignano, the CEO, and I are going to operate as partners; we’re going to bring the company together and we’re completely confident and we’ve seen it already in the integration – the people are well aligned. We have big pockets of employment in Nebraska and Georgia … and other areas of the country.”
Because of the massive size of the companies, The Strawhecker Group, a payments industry consulting firm, estimated the Fiserv-First Data integration could take as long as 10 years.
“The integration of two companies of this scale will undoubtedly be a challenge – the short-term shock will take more than 18 months to recover from, with longer implications (culture, systems, etc.) possibly resulting in friction for a decade,” according to the report.
Yabuki pushed back on that characterization, saying the companies’ commitment to excellence means “it better not take 10 years.”
“We’re going to be very focused on getting it done as quickly as possible,” he said. “But I will say in fairness if we’re doing our job, we’ll continue to identify opportunities that exist between the two companies. So I’m hopeful that in 2045, we’re still talking about how the coming together of the companies has created something special.”
While they now pale in comparison to the First Data deal, Fiserv has been making some significant changes to its businesses in recent years. The company last year acquired the debit card processing, ATM managed services and MoneyPass unit of U.S. Bancorp division Elan Financial Services for $690 million. MoneyPass is the second-largest fee-free network in the U.S., encompassing 33,000 ATMs. And in February 2018, Fiserv sold its Lending Solutions business to private equity firm Warburg Pincus LLC for $395 million.
The combination of two giants in the fintech industry could result in competitors seeking to do their own acquisitions, Ow said.
“There may be an increase in M&A activity due to both this as well as the continued pressure of nimble fintechs like Square, Adyen, etc.,” the Strawhecker Group report said.
Indeed, just after Ow’s prediction, Fiserv competitor FIS announced plans to acquire WorldPay in a $43 billion deal.
It was a coin toss that brought Fiserv to Milwaukee when it was formed from the merger of a Milwaukee and a Tampa, Florida company in 1984.
Fiserv in recent years has been hunting for a new corporate headquarters and in August 2017 had narrowed the search to three locations in the Milwaukee area, but had not ruled out other states. Wisconsin offered $10 million in tax credits for the company to keep its headquarters in the state.
Fiserv has not given an update on the headquarters search for months.
And a $10 million incentive isn’t likely to sway a company as large as Fiserv, Koning said.
Asked about the headquarters decision in an interview, Yabuki said the First Data deal has pushed that conversation to the back burner.
“I feel quite confident that we’ll continue to have a presence in Milwaukee,” he said. “It’s a big job to decide to pick up and put your toys away and go to another city and we’re busy building value for clients, associates and shareholders and that’s our No. 1 priority. We will, over time, make determinations on where the right place is for us to be and when those decisions come up, we’ll do our best to make the best possible decision.”
In July, Fiserv announced it would be the naming rights sponsor for the new $524 million Milwaukee Bucks arena in downtown Milwaukee. With the 25-year deal, the terms of which were not disclosed, the arena became known as Fiserv Forum.
Fiserv is not a consumer facing business, so its decision to become the naming rights sponsor for the downtown Milwaukee arena surprised some.
Yabuki said he was chuckling to himself as he watched the reaction to the announcement in the Twitterverse. Many consumers had never heard of Fiserv.
“The fact that a brand is not a consumer brand isn’t the reason why you do things,” he said. “For us, we thought it was the right time in our evolution to elevate our brand, to signify that we were different than the other companies that were out there, and that we were willing to invest in communicating that to the local communities, as well as the country and the world overall.
“We also believe in what’s going on in Milwaukee. We’re highly committed to Milwaukee. We like what the Bucks and their ownership are doing, and we thought it was a good partnership.”
It doesn’t hurt that the Bucks have the best record in the NBA, led by superstar Giannis Antetokounmpo. The arena has been selling out night after night, and Fiserv Forum has quickly become part of the local vernacular.
And now, the Democratic National Convention is coming to Milwaukee and will host its mainstage events at Fiserv Forum. The city, the arena and therefore the Fiserv brand will get national and international attention.
Yabuki said the arena is also a chance to show off Fiserv’s technology offerings, particularly for point-of-sale transactions.
The naming rights deal would seem to indicate Fiserv has a stake in Milwaukee, and may keep its headquarters here. On the other hand, Fiserv and First Data both have major operations in the Atlanta area.
“When they did the Bucks stadium (naming rights deal), it just seems much more likely, at least for a while, that they stay here,” Koning said. “I think it would be a little surprising if you have a big Milwaukee stadium and then move your headquarters to Atlanta, near term.”
While it wasn’t some grand plan to make all these big moves at once, Yabuki said Fiserv is capitalizing on this moment.
“It’s a combination of how the world is evolving, how Fiserv the company is growing. And as those forces intersect, looking for ways to make sure that we can cement and build a reputation as an industry leader, as a great employer and as a place that shareholders want to put capital,” he said.
Over the years, Fiserv has certainly performed well for shareholders, with 33 consecutive years of double-digit earnings growth. Its stock price is up nearly 17 percent year-over-year.
Splashing its name across an arena presents an opportunity for Fiserv to get in front of a lot of potential eyeballs. Yabuki said that’s key for the company’s talent attraction efforts in the competitive technology field.
“I think everyone knows that Milwaukee can be a challenge to recruit to,” he said. “For people who want to be in the Midwest, this is a great location for that. We’re close to Chicago, we’re close to Madison, we’ve got three universities that basically border downtown. So from that standpoint, it’s all great. It is a challenge, though, because there are so many pockets of technological capability around the U.S. and the world, so when you compare us to the Silicon Valley or you compare us to what’s going on in Massachusetts, I mean, that makes it a little bit more difficult.”
If a technology professional sees Fiserv’s name on the arena during news coverage of the DNC convention or a televised Milwaukee Bucks game, and then three years down the road is searching for a job, Yabuki wants the name to sound familiar.
A 2007 study by Michael Leeds at Temple University found naming rights do not have a long-term impact on the profitability of the firms that buy them. But Yabuki feels confident in the decision.
“We’re a pretty quantitatively based firm. We took a look at all of these things when we made our decision and we believe that the combination of the brand value, the partnership that we have with the team and ownership, and where we think the transformation of financial services is going, all of that together makes this a good return for our clients, associates and shareholders,” he said.
“Well the Bucks have the best record in the NBA. Milwaukee just won the DNC. So everything that Jeff Yabuki touches turns to gold,” Koning said. “I don’t know how you justify it but my guess, some of the stuff that’s come out later’s been they went through a long-term discussion it sounds like and Fiserv probably got a pretty good deal.”
A long-term leader
At 14 years, Yabuki is well beyond the average 7.2-year tenure for CEOs of Fortune 500 companies.
He joined Fiserv in 2005 from H&R Block, where he was chief operating officer and worked for six years. Earlier in his career, Yabuki was a public accountant at Ernst & Young/KL & Co. and held various positions over 12 years at American Express.
“This is nowhere near a job for me. It’s something that I’m excited to get up in the morning, I don’t like to go to bed at night when I’m thinking about this, but it is an industry that is in the midst of change,” Yabuki said.
Fiserv keeps a deep bench of leaders on hand for its succession planning, he said, joking that he doesn’t plan to leave for 40 or 50 years.
“Back in the days of George Dalton and the founders of the company…I was blessed to be handed a company at the end of 2005 that had done really well,” Yabuki said. “And we try every day to keep up with the legacy that we were offered and we also get a lot of energy knowing that when we eventually hand it off to the next generation of leaders, we hope that the company will be even better than it was when we got it and on a good road to continued future success.”
In 2017, Yabuki earned a base salary of $840,000 and total compensation of $10.4 million. His employment agreement has been in place since 2008.
Bisignano earned a $1.3 million base salary and $13 million in total compensation in 2017.
Among the next wave of technologies Fiserv will integrate are blockchain and artificial intelligence.
Blockchain has proven to be the most secure way to move high-value transactions, so Yabuki expects it will continue to play a role in cross-border or large-dollar-value transactions in the next decade.
“We were actually one of the first companies to move money from banks using a blockchain, and so we’re quite familiar with it,” he said. “And we’re watching. But for the technology to work, it has to proliferate across a number of institutions. And as that happens, we’ll continue to stay involved.”
“This blockchain technology or Bitcoin… has been around for a while already,” Ow said. “But that’s only one technology. There could be other technologies coming in and with a full integration from end to end (in payments), this is where the savings come in.”
Artificial intelligence is already an integral part of Fiserv’s platforms, but the company is always looking for new ways to use it, Yabuki said. Right now, that’s through Robotic Process Automation for billers and financial institutions.
Harnessing big data is a key part of the merger, with Fiserv now gaining access to the data at the front and back ends of millions of transactions.
“They get to see both sides of payment transactions now in a way that almost nobody else can,” Koning said. “They’re getting to see a lot of data that others don’t see.”
“One of the things that we’ve talked about in the context of the First Data transaction is we together have an incredibly robust set of data,” Yabuki said. “And so the ability to use the artificial intelligence and deep learning to create new tools and new ways for our clients to operate, we see as being in the nearer term horizon given where technology has advanced over the last few years and where we believe it’s going.”