Mergers and acquisitions: the good, the bad and the ugly30th August 2017
News of mergers, acquisitions and players entering new markets has been flooding our inboxes for months now. The summer has seen some huge changes in the cash and card markets – from big players merging with fellow big players, small players being consumed by the big players, and organizations acquiring companies from their own supply chain.
In most recent news, Vantiv announced its huge merger with Worldpay, Ingenico bought card payments solution newcomer Bambora, First Data acquired CardConnect, Worldline bought First Data’s Baltic division, and cash in transit heavy-weight Brink’s acquired Argentinian based Maco Transportadora de Caudales.
Industry changes like these can often mean uncertainty for all players in the supply chain, but what do these activities mean for merchants specifically?
In this blog, we explore issues to watch out for, what these activities may mean for your operations, and things you need to do to mitigate possible effects.
Perhaps the most common initial response to hearing about M&A activity is to assume it will have a negative effect on the rest of the industry. Horizontal integration – one company absorbing a direct competitor – leads to fewer suppliers in the market, fewer suppliers mean less competition, and this in turn typically leads to higher pricing and less choice for merchants. However, while this is true in most circumstances, this isn’t exclusively the case, and some mergers and acquisitions can even be good news for merchants.
Often consolidation is between large global companies that acquire smaller, local companies in order to expand their international presence. This could be beneficial for merchants seeking a multinational payments solution; as large suppliers increase their presence in new countries, the need for multiple supplier relationships can often decrease.
Vertical integration (organizations acquiring companies that supply them goods) may not necessarily be good for merchants, but can often pose unique opportunities and product offerings previously unavailable to them. The industry most renowned for this kind of consolidation is the oil industry. It is not uncommon for giants including Shell and BP to own their supply chains (such as oil extractors) to cut costs and eliminate transaction costs associated with negotiating with suppliers. This ultimately boosts their bottom line and puts them in a stronger negotiating position when selling their goods. A similar example can be found in Worldpay’s acquisition of YESpay. By using YESpay’s technology, Worldpay was able to offer its clients an integrated payment service, including merchant acquiring, card processing and payment terminals integrated directly with point of sale (POS) systems.
The recent announcement of a merger between Worldpay and Vantiv was an industry example of horizontal integration, a merger between companies offering the same or similar products and services in the same industry. These card giants are both big players in the industry (Worldpay is a key player in the UK while Vantiv holds a large share of the card acquiring market in the U.S.) but this merger is not seen as anti-competitive as they operate primarily in very different geographies. This deal is being publicized as a way for both organizations (who will operate under the Worldpay name) to generate synergies by amalgamating their knowledge and products, offering a better service to their international client base. Whether this comes to fruition for merchants affected by the merger remains to be seen, but merchants partnered with either organization need to be cautious and closely monitor invoices and SLAs in the coming months.
When exploring the negative effects that M&A activity can have on the payments industry there is perhaps no better example than the consolidation seen in the UK cash in transit industry over the last 5 years. Following Loomis’ (indirect) purchase of Sunwin in 2015, and the subsequent announcement that the Post Office would be withdrawing from all cash in transit operations only a year later, the number of nationwide CIT suppliers in the UK fell from four to just two. This leaves the two remaining players, G4S and Loomis, with a near duopoly in the UK market.
Perhaps the ugliest deal of all is NYSE-listed Visa Inc.’s purchase of not-for-profit Visa Europe. Although this is merely an example of horizontal integration between two card schemes operating in entirely separate geographies, it has already caused enormous damage by exposing European merchants to Visa Inc.’s commercial model. CMSPI has long argued that these scheme fee increases are in fact a violation of the EU Interchange Fee Regulation’s (IFR) anti-circumvention clause. These scheme fee increases are being used to fund the huge premium that Visa Inc. paid the issuers that owned Visa Europe. Competition authorities should have foreseen this, and it is now the job of regulators to address it.
There are other prominent examples of “ugly”. In February 2016, the UK’s Payments Systems Regulator (PSR) published the provisional findings of its market review into the ownership and competitiveness of the UK payment systems infrastructure. It concluded that banks must sell their stakes in VocaLink, which operates the UK’s Bacs and Faster Payments infrastructure and owns the LINK ATM network.
Later that year, Mastercard announced it had agreed to purchase VocaLink for £700 million. We see this as an example of both horizontal and diagonal integration. Horizontal because Mastercard is a direct competitior to VocaLink in the market for the supply of payments infrastructure, and diagonal because Mastercard is purchasing the supplier of Mastercard’s competitors at the downstream operator level. At CMSPI we believe this was a particularly disturbing acquisition that is likely to result in excessive fees for end users (merchants and consumers) due to decreased competition, as well as stifled innovation.
Merchants need to carefully assess all consolidations within the payments market on a case-by-case basis. It is too simplistic to simply label all acquisitions and mergers as bad news for merchants. There are too many complex factors to consider, and as discussed throughout this article, these consolidations can often be beneficial for merchants who are pro-active in seeking the opportunities they can provide.Callum Godwin | CMSPI VP of Research
As a merchant, if you are engaged with a supplier who has recently been part of a merger or acquisition it is crucial that you review your arrangements as soon as possible. If your supplier has purchased a rival for a premium price (as is almost certainly the case) are they trying to recoup the cost of this investment with higher pricing structures for their consumers (merchants)? On the other hand, if your supplier has recently been part of a merger that should boost their expertise and product offering, are you seeing the benefit of this materialize in more competitive pricing, better SLAS, or new products and services being offered?
Merchants need to keep these important questions in mind as consolidation in the industry becomes more and more prevalent.