News

Rumors of sale dog Concord

A report that Concord had put itself up for sale sent the company's stock down to its lowest price in three years. It's the latest in a string of tough breaks for the transaction processor.

March 19, 2003

In an industry where the murmur of whispered rumors is a common sound, the speculation about transaction processor Concord EFS has risen to a roar.

The investment community is convinced that Concord has put itself up for sale. So convinced that Bloomberg News, citing "people familiar with the situation," reported on March 10 that Concord had hired Goldman Sachs Group to help it find a buyer.

The alleged asking price: $6 billion.

After the report appeared, the company's stock dropped from an opening price of $10.35 to $8.52 on March 10, with more than 29 million shares changing hands. That price was the lowest since March of 2000.

Concord has said that its policy is not to comment on rumors. However, said analyst John Kraft of D.A. Davidson & Co., "The longer we go without hearing anything from them, the more I think there's some truth to the rumors."

Kraft noted that Concord in August issued a denial that it was under investigation by the Securities and Exchange Commission after a report to that effect appeared on Briefing.com, a business site. Concord stock dropped 14 percent on Aug. 7, from $19.39 to $16.87.

Catch a falling Star

Both Kraft and Jeff Baker, a senior research analyst with U.S. Bancorp Piper Jaffray, believe that Concord may be experiencing difficulty in getting big banks like Wells Fargo and Bank of America to renew their contracts with Star Systems, the EFT network that Concord purchased in late 2000 for $850 million in stock. The acquisition gave Concord control of nearly half of the debit volume in the United States.

Multiple Star contracts will expire in 2004, Kraft said. Concord's February appointment of former Bank of America executive Bond Isaacson as a co-chief executive may indicate that Star is having trouble getting banks to re-up. Star accounts for a third of Concord's revenues and is its biggest driver for future growth, he said.

Isaacson joined Concord as an executive vice president last December. The company had indicated in September that Edward Labry, Concord's president since 1974, would become CEO.

Kraft said there is "a lot of guesswork by analysts" when it comes to banks' relationships with Star. "Network affiliation is not just a dollars and cents decision. Politics are involved as well," he said.

Baker said that Visa International appears to be positioning itself as more of a direct competitor to Star. Under that scenario, Star could suffer. "Visa may be pushing for exclusivity on cards. No big banks have made a decision yet, but they may be interested in reducing the number of (network) bugs on their cards," he said.

Visa has been mentioned as a possible Concord suitor, along with First Data Corp., Electronic Data Systems (EDS), Total System Services, Automatic Data Processing and Fiserv. Baker discounts Visa as a buyer; he believes that First Data and Fiserv are the most logical candidates.

Both analysts said that Concord's fortunes don't rest entirely with Star.

"Does Concord have to have the banks to be successful in the (debit) space? Absolutely not," Baker said. "They could still make money as a merchant acquirer. It's not a zero if they don't re-sign the banks."

"If they lost the network business, it wouldn't collapse the whole company," agreed Kraft.

Not just network news

However, Concord has performed poorly in more fundamental areas, Baker said, including integrating the processing platforms of Star and other acquisitions such as EFT Logix and Core Data Resources.

"They haven't integrated those acquisitions as quickly as they should have," he said.

Concord has taken on four charges in the past three years, all of which have been associated with acquisitions. During a Sept. 5 conference call, executives said that Concord wouldn't need to take any more charges in order to realize " efficiencies" from the mergers. The executives said that merger costs came from merchant write-offs which came on faster than expected. Also, the company did not anticipate that it would have to integrate three acquisitions at the same time.

According to an in industry source who preferred to remain anonymous, Concord is running four different processing platforms: Core Data Resources in Amarillo, Texas; Star East in Maitland, Fla.; EPS in Wilmington, Del.; and the former Star West in Atlanta.

In addition, the source said, Concord still maintains a staff in San Diego, Calif., headquarters of the former Star West operation, even though Star West has moved to Atlanta.

"There's a lot of fixed costs there," said the source, an executive with a transaction processor.

Star recently adjusted its fees for acquirers, lowering interchange from 55 cents to 54 cents and adding a cent to its surcharge fee. "That's a quick fix," the source said. "It's a way of generating revenues without added expense. Better to keep your existing revenue structure and decrease your costs by getting more volume through your switch."

While Concord met analysts' forecasts with its fourth quarter 2002 earnings of $89.1 million, or 18 cents a share, it lowered its full-year earnings estimate for 2003 to 75 cents to 79 cents a share -- well below analysts' expectations of 82 cents a share.

Isaacson, Concord's co-CEO, cited intense competition in the processing business, continued low interest rates and economic uncertainty. Those factors "will increase price compression and raise the cost of renewing customer contracts," he said in a statement.

There were some 4 percent fewer shares outstanding in 2002's fourth quarter. During the quarter, Concord purchased 22.4 million shares of its stock for $325.1 million. Concord's Board of Directors has authorized the purchase of up to $500 million of the company's stock.