ETA Expert Insights: A Mergers and Acquisitions Checklist for ISOs and Acquirers

By the ETA Payment Sales & Strategy Committee

Contributors: Karen Whiteley, C&H Financial; Rick Allen, OpenEdge; David Leppek, Transaction Services; Ajit Prasad, TSYS

Payments technology is a tremendously valuable utility. Card volume in the U.S. is growing about 8% year over year, according to data from the Nilson Report. Publicly traded payments companies outperform the S&P 500 by a large margin, according to The Strawhecker Group, which reports nearly two dozen payments companies valued at over $1 billion. This includes unicorns like Stripe and Adyen (until it went public in June). The main way payments companies increase their value is to expand into new verticals and tap into new merchant segments. And the most straightforward way to do that is to acquire or merge with a company that has access to those merchants.

The value of payments M&A deals exceeded $40 billion in 2017, including Vantiv’s $10 billion acquisition of Worldpay. And the pace of M&A accelerated in 2018, with 72 deals as of September 2018 (compared to 56 deals at the same point in 2017). Acquirers are looking to wring as much value as possible out of the market. So how does a payments company take advantage of this hot market? The ETA Payment Sales & Strategy committee set out to provide guidance to ISOs and acquirers in this position. The first article in the series covers how to properly calculate a company’s value and is available here. This article explores the details and considerations that come after the acquisition has decision is made. While much of the guidance below applies to both mergers and acquisition, this article will focus specifically on acquisitions.

What, exactly, are you acquiring?

This is a critical question that shapes the entire acquisition process – if you have not clarified it yet, do so as soon as possible. Typically, payments industry acquisitions involve acquiring a residual stream, namely the income from processing payments for a portfolio of merchants. But an acquisition can also involve taking on stock in a publicly traded company. Here are some questions to ask:

• Are you getting any staff or agents with this acquisition?
  • Are the sales staff and/or agents incentivized to keep the portfolio performing?
  • For agents, are you equipped to calculate their residual splits post-acquisition in the same way they are calculated before the acquisition?

This typically involves a complex schedule ‑ if you are unable to calculate and pay your agents in the same way they were paid before, they may be incentivized to take their business elsewhere. In this event, do you know if the agents are contractually obligated not to leave? And can you enforce that obligation if they do?

• Do you have plans for retaining the acquired company’s employees?

• How “sticky” are the merchants in the portfolio? For instance, is there software or an ISV relationship that prevents them from leaving?
• Do you plan to make changes to what you’re purchasing? For instance, will you be changing the processor or the systems used? How will this impact the merchant portfolio?
• Will you be able to add additional services to the portfolio? For instance, can you cross-sell products like gift cards, loyalty, or a mobile offering?
• Are you confident in your acquisition’s security infrastructure?

As a first step, you should obtain evidence that the either payments supply chain and all relevant partners are secure, including call centers, loyalty software, any 3^rd parties that are connected by API, and any other systems or supporting players. But it is no longer sufficient to demonstrate basic compliance. You must be convinced that your acquisition has a culture of security and good governance and has a robust infrastructure for technical security risk management. This is critical for both your organization and your vendors.

Whom do you need to contact / get approval from before an acquisition?

The order of these steps may vary significantly, as there may be dependencies that prevent you from notifying your clients or external partners. For instance, you must complete all necessary due diligence before notifying your customers. But you will need to notify each of these entities before the acquisition is complete:

• Ask your attorneys about the entities and people to whom you have a legal obligation before, during, and after the acquisition.
• Notify your processor, sponsor bank, and/or acquirer as early as possible, once you are confident the deal will close.

Many processor contracts include a right of first refusal in the event the company is acquired. Conversely, the company that’s doing the acquiring may need conversion assistance from its processor.

• Make sure your clients are aware of what is happening them and notify them of any changes or disruption to your usual course of business.
• Make sure all your client-facing employees (in both companies) have talking points to share with any partners or customers they interact with.
• Consider any third-party dependencies, particularly ones that might be affected by the acquisition ‑ such as ISV relationships or referral endorsements.

How portable are prior agreements and relationships, and how will they be affected by the acquisition?

• Will the new acquiring bank allow you to inherit the existing acquirer’s agreements?

What are some likely outcomes, and have you anticipated them?

• Have you considered claw-back provisions if the portfolio should attrite beyond expectations?
• Conversely, if the portfolio performs better than expected, do you have a plan for installment payments?
• Do you have a plan in the event that one of the players involved starts prospecting your clients?
• Does the seller/acquired company have portability & assignability rights?

It is critical to review any relevant contracts to determine what the acquired company’s rights are, and to develop a plan in the event that the company chooses to exercise them.

How compatible are your systems with your acquisition target’s?

• How compatible is the processing platform from with your current systems. If not, plans to support a new processing platform?
  • Recall that some processors have different platforms (North vs Omaha).
  • Even if it’s the same platform, you may need to re-download it.

What is required during the due diligence process?

Here is a basic list of documents and items you will need to obtain and review carefully:

• Corporation Documents: Operating Agreement, List of Shareholders, etc.
• Financial statements and business tax returns going back at least three years
• Processor, Marketing, and/or Independent Contractor Agreements
• Residual Reporting (12-24 months)
• Login access to processor(s) websites
• Three business reference contacts

What processes are likely to be disrupted by an acquisition?

• Customer services will almost certainly be disrupted. But you can mitigate some of the disruption by being very clear about what the expectations are ‑ consider hours, language, and metrics for the overall quality of support.
• What will your conversions look like? Will you need assistance or support from external partners?
• Are you changing any of the reporting or other online tools?
• Will you be doing any terminal or hardware updates? For instance, if you are processing PIN debit transactions, you will need new debit keys.
• If you will be requiring new software, will you be able to re-program already installed devices in the field, or are they protected?

There are many processes and operations that can be affected and even upended by a merger or acquisition, even though the disruption may not be evident from the outset. The more transparent you can be with all your internal and external clients and partners, the better you can mitigate any potential issues. Your partners may have gone through an acquisition process with other companies they work with, but for those who have not, make sure you’re both aligned on expectations as early as possible. Focus on what you’re gaining or intend to gain from the acquisition, and what you’re prepared to give up in the short term to achieve that long-term growth. Our industry is shuttling through unprecedented growth and change – and the payments ecosystem will emerge stronger for it.