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The sum of $1.8bn does not go as far as it used to. Just four years ago, Fidelity National Information Services, known as FIS, merged with another fintech, Worldpay, valuing the latter at $43bn. On Thursday, FIS said it would sell a majority stake in Worldpay to private equity at a valuation of $18.5bn.
Annual ebitda for Worldpay at the time of both transactions was around $1.8bn. This implies that the valuation multiple of the business has crashed from 24 times to 10 times in the space of a few years.
Both companies were experienced acquirers. That confidence encouraged the pair to combine in a tie-up that was predicated largely on dreaded “revenue synergies”. The phrase supposes the products of merging companies can be cross-sold plentifully to respective customer bases.
Such benefits rarely materialise. Meanwhile, Wall Street has begun taking a sceptical view of the previously go-go fintech industry
FIS specialises in back office payment processing software for banks. Worldpay, once an offshoot of the Royal Bank of Scotland, provides payment processing for “merchants” or retailers. The companies said at the time of joining forces they could achieve $700mn yearly in improved ebitda from cross-selling and cost cuts. Revenue was supposed to grow by single digits.
Ebitda for the combined company hit $6.2bn in 2022, a significant step up from the $4.9bn that the combined businesses achieved in 2018. However, the pair had projected as much as $7bn. More ominously, free cash flow was just $3bn, well below the projected $4-$4.5bn.
Previous Worldpay shareholders have shouldered the pain, along with FIS backers. The 2018 deal was almost all in FIS shares. The stock rallied through 2021. Since then, shares have dropped 60 per cent.
Deal “synergies” disappointed, sure. But there has been a bigger challenge. The economics of fintech have so far failed to resemble the growth, profitability or capital lightness of the best enterprise software companies.
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