First Data

First Data is among the world’s largest Data Processing and Outsourced Services sector businesses in the world.  First Data’s employees generate $1.346B in profits on $7.277B of revenue.  Global output in the Data Processing and Outsourced Services business will likely rise substantially over the next 10 years.  Long-term economic growth may lift all boats, but First Data is determined to remain a market leader.  Sectoral leadership in the Data Processing and Outsourced Services segment takes dedication and consistency, but management seeks out-sized growth.

First Data’s ticker symbol FDC has recently been trading near $32.66 a share.  The First Data corporate headquarters in Greenwood Village CO predicts Data Processing and Outsourced Services profits will satisfy shareholders in search of risk-appropriate returns.

The significance of market volume is sometimes ignored, but with a total market capitalization of $24.639B ensures sufficient liquidity.  With a beta of 1.13, the company is more volatile than the market as a whole.  When the average equity moves higher, First Data moves more aggressively.

Private Equity Strikes Again!

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.