When Worldpay was carved out of Royal Bank of Scotland in the aftermath of the financial crisis, it was a small part of a minor unit with out-of-date technology that was largely ignored by its sprawling parent bank.
Less than a decade later, the same business is being bought in the biggest financial services takeover since the recession, in a deal worth $43bn — equal to all of RBS’s current market value.
The shift, fuelled by a boom in ecommerce and digital payments, marks one of the biggest structural changes in financial services since the crisis, and is now driving a record-breaking run of merger and acquisition activity as companies scramble to take advantage.
Worldpay is being bought by Florida-based financial tech specialist Fidelity National Information Services (FIS) barely a year after Vantiv bought it — and took its name — in a £9.3bn deal that closed last January.
FIS provides a range of technologies that help banks and other financial institutions. In payments, FIS software processes transaction requests from payment networks such as Visa and Mastercard, establishing that funds are available in a valid account, within credit limits and so on.
Worldpay operates at the opposite end of the payment chain, helping to connect both online and brick and mortar retailers to those payment networks.
Worldpay was only a third of the way into its integration plan, but FIS chairman Gary Norcross said there was no time to wait: “This is such a fast-moving industry you have to grab the growth and move toward where the growth is when you have the time.”
Monday’s deal, two months after rivals Fiserv and First Data agreed their own $39bn combination, means 2019 has already become the third successive year to see a record amount of payments dealmaking. Since the start of the year, 30 deals worth a total of $85bn have been announced, compared with $49bn in all of 2018, according to Dealogic data.
Analysts and industry experts said they expected the trend to continue, with the latest acquisition putting further pressure on rivals to avoid being left behind or displaced by new entrants.
“As predicted, 2019 is turning out to be the year for consolidation in the fintech industry and, in particular, the payments sector,” said Stuart Bedford, a partner at law firm Linklaters.
The payments industry was once dominated by traditional banks, but many of them have sold out and since then it has gone from a sleepy backwater of finance to one of its most exciting sources of growth, fuelling a race to become the global leader.
A fast-growing crop of upstart financial technology or “fintech” companies — from PayPal in the US to Alipay in China — are lining up to challenge the incumbents, squeezing margins by offering faster, cheaper and easier-to-use payments.
Gareth Wilson, global payments lead at Accenture, said: “Consolidation in the market looks set to continue in order for payment companies to grow globally at scale and compete with the competitive threat of new entrants to the industry.”
Darrin Peller of Wolfe Research said: “I would not be surprised if we saw another deal in merchant payments technology before long.” Publicly-traded payment companies that could be candidates for a deal include TSYS, Global Payments, Jack Henry, and Netherlands-based Adyen.
Speaking to analysts on Monday, Mr Norcross and Worldpay chief executive Charles Drucker were both keen to stress that theirs was not a defensive merger. “This is all about an offensive deal and going to where the growth is happening and looking in the long term”, Mr Drucker said.
For FIS, which provides a wide range of services ranging from core banking platforms to asset management software, the deal provides a way to bulk up its relatively small business providing payment services to retailers and ecommerce companies. For Worldpay, FIS’s stronger presence in fast-growing markets like Brazil and India provides an opportunity to speed up its international expansion.
The combined company expects to have annual revenue growth of around 6 per cent when the deal is completed and up to 9 per cent in three years, compared to double-digit growth in less developed markets. It expects $500m of annual revenue synergies by the end of the third year, with a further $400m in annual cost savings.
The plans echo earlier deals that have entailed once-specialised companies combining to become “one-stop shops” that can provide more of their customers’ payment needs. E-commerce expert PayPal, for example, paid $2.2bn for Swedish group iZettle, which focuses on in-store services. The earlier Vantiv and Worldpay combination, meanwhile, brought together a US-focused business with a dominant rival in Europe.
But the relatively small premium being paid by FIS — about 13 per cent compared to Worldpay’s close last week — also reflects the slower growth prospects in both companies’ core markets, and the need for established companies to cut costs.
This pressure will only add to the impetus for consolidation. One investor said newly-listed companies could also be part of the dealmaking spree. On Monday, Italy’s Nexi announced plans to be one of Europe’s largest initial public offerings of the year, while UAE-based Network International is preparing to list in London.
A person close to Nexi said: “If you ask me is Nexi going to be only Italian in five or 10 years’ time, I don’t believe so — consolidation is happening and Nexi will be part of it.”
Get alerts on Mergers & Acquisitions when a new story is published