Fiserv Overpays for First Data

In a surprising move, wide-moat rated Fiserv FISV announced its intention to acquire First Data Corporation in an all stock deal, offering up 0.303 Fiserv shares for every First Data share outstanding. Based on the Jan. 15 closing price for Fiserv, the offer values First Data at $22.74 per share, or about $21.8 billion in total equity. As First Data is the product of a KKR leveraged buyout, the company's balance sheet still has approximately $17 billion in net debt, so Fiserv is ultimately paying an enterprise value/operating income multiple of around 19.5 (based on trailing 12-month GAAP operating income), which strikes us as expensive. While we think Fiserv faces an uphill battle to extract sustainable value from this deal, we are maintaining our $66 per share fair value estimate for the firm until we have more concrete details to work with in our valuation model. Given the size and price of the deal, though, investors should expect some downward adjustment to our fair value estimate.

While both management teams provided rosy projections for the combined entities, we'll need more information before we can buy into managements expectations that the merger will increase free cash flow by $900 million through cost synergies. Since they don't intend to consolidate operating platforms for the combined companies, the cost-cuts will have to come from reducing corporate overhead. Fiserv already announced a plan in 2015 aimed at achieving cost savings of $250 million over five years, so it seems to us that realizing cost savings of more than $900 million is a dramatically more ambitious undertaking and carries risk with it. Add to that the fact that First Data's total operating expenses have barely moved since CEO Frank Bisignano became CEO in 2013, suggesting to us that First Data's operations are already pretty lean. Though these are just our initial impressions, we are skeptical of the deal given the price and difficulty integrating two companies of this size.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.