CheckFree Soars on Buyout
Daniel Del'Re
08/02/07 - 03:58 PM EDT
Investors in electronic payment processor
CheckFree (CKFR Quote) started Thursday with a treat when the company announced it would be acquired.
CheckFree shares soared more than 23% to $45.46, blasting through its 52-week high, on announcing that larger rival
Fiserv (FISV Quote) would pay $48 a share for the company.
The deal is worth $4.4 billion, about 10% more than CheckFree's preannouncement market value.
The news knocked CheckFree's share price out of its doldrums. The company's stock has widely underperformed the market for most of this year, losing roughly 8% of their value versus a 2% rise in the
S&P 500 Index.
CheckFree has dominated the market for electronic payment processing and has maintained revenue and profit growth at a healthy clip for the past several years. It has deep client relationships with large U.S. banks such as
Wachovia (WB Quote) and PNC Bank, a unit of
PNC Financial Services ( PNC Quote).
These relationships can expand Fiserv's base of financial services clients. Over the past two years, financial services customers have accounted for about 75% of revenue from services and processing fees, and 40% of product revenue.
The company has made several acquisitions in recent years to tack on expertise in insurance and medical services markets.
CheckFree also brings hefty client accounts in the retail sector.
J.C. Penny (JCP Quote),
Home Depot (HD Quote) and
Lowes (LOW Quote) use its electronic billing service for their customers.
Telecom service companies with large customer bases, including
Verizon Communications (VZ Quote) and
AT&T (T Quote) use this bill processing technology.
During the last fiscal year, CheckFree processed over 1.1 billion payment transactions, a 25% increase. The company delivered nearly 185 million electronic bills during fiscal year 2006, an increase of 32% over the prior year.
The company's stock has suffered largely because of uncertainty over whether it will lose Bank of America as a customer.
Bank of America ( BAC Quote) is the second-largest U.S. bank, and one of CheckFree's largest customers.
The company's quarterly financials have also cast a pall on CheckFree's growth story. For the past several quarters, operating profit growth has generally lagged growth in revenue. In the last three quarters, revenue growth has been mired in the single digits.
But prior to the acquisition, analysts had forecast a rebound, boosting quarterly revenue by 21% and operating profit by 11%.
Clinching the deal before this anticipated pop in revenue and profit may have allowed Fiserv to capitalize on weakness in CheckFree's stock price.
Fiserv said it expects the deal to provide $100 million in annual cost savings and $125 million in "revenue synergies." This means that once the two companies combine their expertise and customer bases, they should be able to generate an additional $125 million above and beyond their standalone revenue potential.
The extra revenue and cost savings should take full effect by 2008, adding extra fuel to Fiserv's earnings per share, the company said.
Fiserv shares were recently trading up 24 cents to $49.43.
