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4/3/2003
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Taking Stock: First Data Reaches For A Star

The acquisition makes sense for strategic and economic reasons

First Data Corp., the global leader in payment processing, is acquiring Concord EFS, a leading electronic-transaction-processing company. It shows that in the current economic environment, strong, financially sound companies that are well managed, such as First Data, can take advantage of opportunity.

Concord has a strong installed customer base within retail markets such as groceries, convenience stores, and gas stations. First Data, with little entry into these markets, would benefit from this. However, the big attraction is Concord's Star system, one of the leading PIN-based debit networks, with around a 56% market share. This is an area in which First Data isn't a market leader. Based on Concord's expertise in PIN-based transactions, it would offer great complementary services and, potentially, a higher growth rate, because PIN-debit transactions are growing fast. This would add to all the other payment and E-commerce capabilities of First Data, which owns Western Union. The acquisition of Star is subject to the approval of the member banks within the system, however.

There were initial rumblings that the price would be as high as $15 per share of Concord in First Data stock but, in fact, the deal calls for 0.4 shares of First Data, or roughly $13.87 per share of Concord, based on First Data's share price as of April 1. Assuming some nominal cost savings, earnings per share for First Data shareholders will be minimally affected in 2004. Based on estimated cost savings of $230 million, the deal will add to earnings per share by 2005. Estimated Wall Street 2004 earnings per share consensus for First Data is $2.17. Based on the current price of $34.79, the 2004 price-to-earnings ratio is 16.

Concord is projected to earn 86 cents per share for 2004, or roughly 16 times its targeted acquisition price of $13.87 per share. Therefore, outside of $400 million of related one-time merger costs, First Data's earnings per share should remain stable and the price-to-earnings multiple should remain constant.

In addition, First Data will do a major buyback of shares after the deal closes. Concord has $1.2 billion in cash on its balance sheet, of which more than $1 billion will be used for share buybacks; First Data still has $250 million of unused capacity left on its share-repurchase authorization. Based on the outstanding number of shares of about 952 million, after acquisition, the estimated $1.25 billion in potential share buybacks will result in almost a 4% reduction in outstanding shares.

Whenever a deal like this is proposed, the acquirer's stock usually declines while the acquisition's stock price rises. Interestingly, there are merger arbitrage players who will short the acquirer and buy stock in the acquisition target. This process keeps some downward pressure on the acquirer's share price until the deal closes. However, this strategy should be limited to traders and speculators, not investors. Also, the deal still has to be approved by the Department of Justice's antitrust division and other regulatory bodies.

This deal makes sense for both strategic and economic reasons. It should be highly beneficial, in the long run, for First Data's shareholders. The short-term economic turmoil is limited. Seems like a good opportunity to step up and invest in First Data if you still believe in long-term investing.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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