$21.5 billion merger of Global Payments and Tsys 'reinforces Square superiority'

It’s the third mega-merger this year in the payments industry: Global Payments (GPN) is acquiring Total System Services (TSS) in a $21.5 billion all-stock deal, the companies announced on Tuesday.

This deal follows payments processor Fiserv buying First Data for $22 billion in January, and Fidelity National Services buying Worldpay for $35 billion in March.

As Global Payments CFO Cameron Bready told Yahoo Finance’s Yfi AM live show, “We’re in a scale business, and scale is always helpful… what’s nice about bringing our two companies together is it’s the right kind of scale. Unlike other deals that have been done in our space, we are pure-play payments.”

The tie-up of Global Payments and Tsys, Bready says, “better positions both of us to be able to compete with the ever-changing landscape around payments. We gain exposure to over 900 premiere financial institutions globally, with whom we can now partner… In addition, Tsys today has good exposure in digital P2P payments, as well as B2B payments through their NetSpend business.”

But at least one payments analyst doesn’t see it that way.

Dan Dolev of Nomura Instinet calls the deal “more defensive than offensive” and adds, “I don’t think this merger makes a lot of sense strategically.”

Dolev sees the merger as the latest sign that big payments players are worried about Square, which is gaining merchant market share quickly. “Something is happening with the market where the interlopers, the disruptors are actually going mainstream... and they are hurting the traditional operators like Global Payments, who, they do have an integrated payments practice, but it’s much smaller and, in my view, much more inferior to the newcomers like Square.”

“Jack Dorsey should be happy”

Nomura has religiously tracked downloads of Square’s Cash App vs PayPal’s Venmo, and Dolev says Cash App’s rise (an estimated 50 million downloads total) is bad news for Tsys, since its Netspend service targets the underbanked—the same demographic Cash App services with its new debit card.

Dolev concludes that the Global Payments merger with Tsys “reinforces the Square superiority, because it’s all happening as a result of the disruption that’s caused by Square—both on the merchant acquiring side, where Square is going after retail and restaurants, and gobbling up share, but also on the prepaid Netspend angle, where the Cash App is gaining a lot of traction and is going after this. So I think Jack Dorsey should be happy.”

In its Q1 2019 earnings report, Global Payments network fees in North America (fees collected on behalf of card companies like Visa, MasterCard) were up by only 3%, another metric Dolev says is bearish for Global Payments, because Visa’s revenue from such fees rose by 8% in the same quarter. In other words, Global Payments is underperforming vs. the growth of the larger U.S. payments industry. “The situation at Global Payments is much more somber than they are saying,” Dolev warns.

If the story of the payment processor business in 2019 has been all about M&A so far this year, that won’t be the case in 2020, Dolev says, because Global Payments-Tsys is likely the last big rollup in the space. He does not see any “natural acquirers” for Square now, which he argues gives Square “a scarcity value.”

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Daniel Roberts is a senior writer and live show host at Yahoo Finance. He closely covers payments tech. Follow him on Twitter at @readDanwrite.

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