February 13, 2023 | Micky Tesfaye
Is Breaking Up the Answer? Maybe, says FIS
FIS is reportedly set to spinoff Worldpay, undoing the $43 billion acquisition it completed a mere four years ago. At the time, the Worldpay acquisition was seen as a strategic move to expand FIS footprint in the rapidly growing payments industry. The combination of FIS and Worldpay would create a genuine financial infrastructure behemoth.
But the anticipated benefits of that acquisition haven’t exactly come to fruition. Take FIS’ valuation for example: Since the acquisition, its market has tumbled and is currently lower than what it paid to own Worldpay.
So what’s going on?
Unbundling the bundling
One of things that’s particularly interesting about this story is the context of the wider environment.
This was supposed to be the year of the fintech M&A. Amid continued economic challenges and investors increasingly prioritising efficiency over growth, fundraising conditions for fintechs were not exactly rosy. Not least, for those that had raised at over-extended valuations.
For incumbents and those with plenty of dry powder, this would leave a slew of unprofitable companies without sufficient runway or an extremely compelling growth story ready to be scooped up at a fraction of their recent valuations.
Much of what we’ve seen this year has supported this thesis: It feels like there’s a fintech M&A story every day. Fidelity dipped its toes in the buyers market for the first time in seven years, acquiring Shoobx. Marqeta also made its first ever acquisition. And Deel, representing all those non-public fintechs, acquired Capbase.
What the FIS, Worldpay uncoupling story suggests is that while M&A activity may heat up this year, it's also a story with serious caveats. Those same factors driving investors to focus on efficiency in place of exuberant growth ambitions are playing a hand here too.
The genesis for the FIS split stems from a strategic review that came about as a result of activist investors, namely hedge funds D.E. Shaw and JANA Partners. And we’ve seen other industry behemoths, from General Electric to Johnson & Johnson, embark on similar unbundling of their sprawling business in recent years to placate investors focused on leaner operations and enhanced profits.
Likewise, I anticipate similar pressure on legacy financial institutions as well as major fintech players when it comes to their own potential shopping sprees. For FIS a spin-off could turbo charge profits in its core business by giving the company renewed strategic focus. Conversely, by releasing Worldpay from the shackles of integration, it could allow the company to better compete in an increasingly dynamic merchant services landscape.
Show me the value
The FIS-Worldpay uncoupling is a cautionary tale for all of those embarking on a shopping spree: M&A activity may heat up this year, but it's also a story with serious caveats.
The pressures driving investors to focus on efficiency in place of growth ambitions are playing a hand here too. The spin-off shows that creating value from a merger is not just about the transaction itself, but also about making the new combined entity work.
In fact, the M&A may be the easy part of the process, but integrating culture and technology to make the new entity sing off the same hymn sheet is a path filled with obstacles.
The story serves as a reminder of the need for strategic focus and the importance of considering all potential outcomes before embarking on a merger or acquisition. It also tells us, whether we like it or not (and I am so sorry to say this Mr Al Green) sometimes, breaking up is the answer to unlocking the true potential of a business.