According to the IHT, one of the largest private equity firms in the world has just signed a deal to buy First Data, the credit card payment processor, for over $25 billion. First Data has been a money machine for years, growing along with the credit card industry to become a true behemoth.
But while the underlying business at First Data is clearly sound, overpaying for a great company can still result in poor returns. The private equity firm KKR will pay a 26 percent premium to the market value of the company and assume over $3 billion in debt. That works out to 27 times estimated earnings per share.
You don't even need to resort to back of the envelope calculations to see that such a large premium is only justified by impressive future growth. It's certainly possible that growth like that is going to happen, and only a fool would bet on the company actually shrinking, but it takes good management to maximize growth and First Data looks like its about to lose its leadership.
Henry Duques, the chief executive of First Data, is 63 and looking for a way to get out. He's already tried this in the past - he turned the company over once before in 2002, but now he's back in control because his first hand-picked successor couldn't cut it.
I don't think buying First Data is a bad decision by any means, but KKR is going to need to demonstrate impressive management over a business that hasn't really done that on it's own in order to make this investment a winner.
KKR has access to lots of cheap debt right now, and I'll bet that makes all of KKR's calculations look much more tractible, but at the end of the day the underlying business needs to perform. Credit cards aren't going to leave our society tomorrow, but if Dave Ramsey has his way, their impressive growth will stall.
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