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Analysts skeptical on Fiserv and First Data deal

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It’s one of the biggest deals in financial-technology history, with promises of hefty additional revenue generation and cost savings to boot.

But some Wall Street analysts are skeptical about the $1.4 billion in revenue and cost-saving synergies Fiserv and First Data have said will come from their $22 billion deal announced Wednesday.

The announcement came to the surprise of many in the industry given the lack of overlapping business the two companies share. Fiserv’s main business is focused on financial technology for small and medium-size banks, while First Data specifically handles payment processing.

The companies said they expected at least $500 million in revenue synergies — the benefits created when two companies merge — thanks to areas such as bank-merchant services and FirstData’s card-payment solution for merchants, Clover. That’s in addition to $900 million the firms expect to save in costs over the same time period from consolidating the firms’ corporate structures and streamlining tech and operations.

These goals may be lofty, say some analysts who follow the companies.

Moshe Katri, an analyst at Wedbush, told Business Insider that while cost savings could be expected through the new deal, creating additional revenue might be a tall task.

“The revenue synergies are likely optimistic,” Katri said. “I would say that historically, Fiserv has not been able to consistently deliver on the top line. And I would say the same thing on First Data.”

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In a note to clients, the SunTrust Robinson Humphrey analyst Andrew Jeffrey offered a similar sentiment.

“We have faith in Fiserv’s management to at least execute around $900 million of run-rate cost synergies; projected $500 million of rev synergies will likely be much more difficult,” the note said. “While we appreciate the merits of combining the companies’ complementary offerings and FI bases, they couldn’t be more culturally disparate. In addition, a recent First Data customer conversation highlights challenges with US service levels, in our opinion. This raises the execution bar for the combined co, in our view.”

Larry Berlin, a senior vice president who specializes in research at the venture-capital firm First Analysis, told Business Insider he’d never imagined that the two companies would merge. While there is some overlap in what they do in the payments space, he said they were still different businesses in different markets.

The base of Fiserv’s business is providing core banking systems to small and medium-size banks, he said. That type of offering isn’t appealing to many of First Data’s clients: large banks and merchants.

First Data clients like Wells Fargo and Bank of America don’t need core processing from Fiserv, as they handle it internally, Berlin said. And while Fiserv already has those banks as clients for its bill-payment offering, getting them to adopt its main business would be a big ask, he added.

Colin Plunkett, an analyst at Morningstar, questioned the combined company’s ability to meet its cost-savings plans. He cited the fact that since Frank Bisignano was named CEO of First Data in 2013 the company’s operating expenses had barely moved, suggesting it was already fairly lean.

Plunkett said that because the operating platforms would not be merged, cost cuts would have to come from reducing corporate overhead. He also cited Fiserv’s 2015 plan to reach cost savings of $250 million over five years, a significantly more moderate expectation compared with the company’s latest goal.

Corporate culture is always a big factor during mergers and acquisitions. The potential challenges of bringing together two companies of this size was noted by some analysts.

In Plunkett’s note, First Data’s rating on Glassdoor, a website where current and past employees can rate employers, was highlighted for its low ratings. On approximately 2,500 reviews the company has an average rating of 2.8 out of 5, with Bisignano receiving a 49% approval rating, Plunkett wrote. That’s in comparison to Fiserv’s rating of 3.3, along with CEO Jeff Yabuki earning a 78% employee approval rating. Plunkett went on to point out that the average rating among all the firms Glassdoor monitored was roughly 3.4.

“We think it’s worth mentioning that First Data’s Glassdoor employee ratings are alarming,” the note said. “While we recognize that these reviews can be falsified and may not give a totally accurate picture of a company, we think it’s instructive and warrants further attention in our ongoing research.”

Some analysts, however, were less skeptical of Fiserv and First Data’s claims of cost savings and revenue generation. Jeff Cantwell, an analyst at Guggenheim, told Business Insider his initial reaction to the deal was positive.

“From a strategic standpoint, it makes sense for both sides to combine,” Cantwell said. “You think about going forward. There should be a lot of opportunities on the revenue side and on the cost side for the combined company. It should be a good deal.”

A spokeswoman from Fiserv reiterated remarks regarding potential synergies between the two companies made by Yabuki in the conference call Wednesday morning. First Data did not return multiple requests for comment.

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