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How FIS is leveraging acquisition of Sungard

Source: Arun Shankar

Publish date: 23 Aug 2015 Print Email

In the beginning of August, diversified financial services player FIS announced its intention toacquire financial application vendor Sungard, for $9.1 billion. The acquisition of Sungard by FISmakes the combined entity the largest global financial services technology company. The overallrevenue of the merged entity of FIS and Sungard would be $9.2 billion using year ending 2014figures. In the merged entity, again using year ending 2014 figures, FIS would contributeapproximately 70% of the combined revenues and Sungard approximately 30% of the combinedrevenues. However in the case of operating income, FIS would contribute 94% of the combinedfigure whereas Sungard would contribute only 6%.

Regional industry experts point out that offerings from FIS and Sungard are in some wayscomplementary to each other. On an overall basis, Sungard’s business model is built on revenuefrom banking application software licenses, while FIS model is built on revenues from paymentprocessing and managed services. Indicates Sunil Paul, Chief Operating Officer Finesse, afinancial and banking industry system integrator, “Globally Sungard is considered to be a leaderin capital markets, risk management and reconciliation solutions, while FIS is strong in corebanking, payments and processing.”

On a relative basis Sungard entered the region earlier than FIS, while both vendors have active

The overall revenue of the merged entity of FIS and Sungard would be $9.2 billion using year ending 2014 figures.

The combined entity would be the largest global financial services technologycompany but will need to overcome platform integration challenges.

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and referenced accounts in the region. “Within the region, Sungard has built its reputation onbeing a leader in reconciliation, enterprise risk management and treasury solutions,” adds Paul.As per Sungard’s 2014 annual report, emerging markets now comprise 12% of SunGard’soverall revenue. Middle East, Africa, Rest of America account for 4% of its overall revenue.Some regional payment processing entities are known to be using FIS solutions.

In May 2014, Sungard joined the Dubai Financial Market Vendor Registration Programme,which regulates the provision of order management systems and online trading solutions toDFMlicensed brokerage firms. The new registration service for technology vendors is designedto improve the quality of the market connectivity solutions offered to brokers and their investorclients. The service is aimed at further enhancing excellence in line with the Dubai Smart Cityinitiative. Sungard offers access to stock exchanges in the Middle East, covering multiple assetclasses and delivering advanced trading functionalities together with integrated market datafeeds.

Further in Janaury 2014, Faysal Bank from Pakistan implemented Sungard’s Ambit CoreBanking solution. Prior to the FIS acquisition, Sungard has been divesting its businessesincluding the January 2015 split of its Availability Services from its financial systems, publicsector and education software application business.

FIS has seen a healthy growth of revenue and profit margins over the last ten years. It reported arevenue of $6.4 billion in the year ending 31 December 2014, versus a revenue of $1.2 billion in2005. This represents an approximate revenue CAGR of 20% over the last ten years. Itsoperating income was $1.3 billion in the year ending 2014, at a 20% margin over revenue, withan approximate healthy CAGR of 45% over the last ten years. The primary business contributionin the past has been from its Payment Solutions Group at 40% of revenue share in year ending2013, followed by Financial Solutions Group at 39%, and International Solutions Group at 21%.However consecutive FIS annual reports show a declining share from Payment Solutions Groupfrom 45% in 2007 to 39% in 2014. However Payment Solutions Group still has the highestoperating margin of 40% in 2014 amongst its three primary Groups.

Sungard in comparison to FIS has shown an almost flat but moderately declining revenueperformance over the last four years. Its revenue has declined from $2.9 billion in year ending2010 to $2.8 billion in year ending 2014. Its operating income as margin over revenue, hasfluctuated from 2% in 2010, to 15% in 2013, and 3% in year ending 2014, with an approximateCAGR of 10% over last five years. Its software business accounts for 40% of the total revenue,followed by Saas at 38%, and professional services at 22%. Following the 20082009 financialmeltdown, a number of Sungard customers moved from capex to opex software licensing thusdriving the Saas cloud based revenue stream. Sungard has also been divesting a number of itsbusinesses to restore profitability and recently abandoned its public offering initiative in favourof the FIS offer.

The overall revenue of the merged entity of FIS and Sungard would be $9.2 billion using year ending 2014 figures.In the merged entity, again using year ending 2014 figures, FIS would contribute approximately 70% of thecombined revenues and Sungard approximately 30% of the combined revenues. However in the case of operatingincome, FIS would contribute 94% of the combined figure whereas Sungard would contribute only 6%. (Source FIS,Sungard Annual Reports, Graphics TCM)

A significant challenge for FIS from the acquisition of Sungard would be integration of the largenumber of technology platforms that have been acquired by both FIS and Sungard over theyears. The latest acquisitions by FIS prior to Sungard include Marketing Solutions, LenovoAsiaInfo Technologies Financial Service division, Applied Financial Technology, eFunds,Metavante, Compliance Coach, Capco, Toronto Dominion Wealth Institutional, ProNetSolutions, mFoundry, Reliance Trust Company, Clear2Pay. The latest acquisitions by Sungardinclude Strohl Systems, GL Trade, Systems and Computer Technology, Comdisco, Oshap

Technologies, Infinity Financial Technology, amongst others.

Another challenge would be the capability of the merged FIS and Sungard entity to developsoftware products that can take on established players. Adds Paul, “Will they be able to come outwith a strong core banking platform in the region which can stand up with the likes of OracleFlexcube, Infosys Finnacle, Temenos T24 and Mysis Equation.”

However, looking at Sungard’s revenue streams, a significant benefit for FIS appears to be fromSungard’s well developed Saas cloud offering, which accounts for 38% of Sungard’s totalrevenue, using year ending 2014 figures. Its SaaS and cloud offerings are delivered fromSungard data centres.

Sunil Paul, Chief Operating Officer Finesse.

FIS overview

FIS is a global vendor in banking and payments technology as well as consulting andoutsourcing solutions. Through its Capco brand, it delivers a range of information technologyconsulting, advisory and transformational services to financial institutions. These offeringsinclude integrated consulting services, integrated core banking and payment solutions, mobilebanking solutions, wealth management services, item processing services, card issuer services,risk management solutions, electronic loan amendment applications and services, electronicfunds transfer services, prepaid and gift card processing for financial institutions, includingcommunity banks and credit unions. Outsourced solutions include fully outsourced cardissuerservices and customer support, payment processing and switching services, prepaid and debitcard processing, item processing, software licensing and maintenance, outsourced ATMmanagement and retail pointofsale check warranty services, fully outsourced core bankprocessing arrangements, application management, software licensing and maintenance andfacilities management.

FIS consists of the following business divisions, Financial Solutions Group, Payment SolutionsGroup, International Solutions Group, Corporate Group.

Financial Solutions Group

The focus of FSG is to provide services and software to satisfy the processing, technology, andoutsourcing needs of financial institution clients in North America. FSG services the core andrelated ancillary processing needs of North American banks, credit unions, automotive financialcompanies, commercial lenders, and independent community and saving institutions. FSGclients typically commit to multiyear contracts that provide a stable, recurring revenue base andopportunities for crossselling additional financial and payments offerings. Offerings alsoinclude outsourcing arrangements, cloudbased provider, application service provider, facilitiesmanagement processing, application management arrangement, software licensing arrangement.Solutions include core processing and ancillary applications; channel solutions includinginternet, mobile and eBanking; fraud, risk management and compliance solutions; syndicatedlending; global commercial services; strategic consulting services.

Payment Solutions Group

PSG provides services and software for EFT, card processing, item processing, bill payment,government payments processing needs of clients in North America. PSG is focused on servicingthe payment and EFT needs of North American headquartered banks and credit unions,commercial lenders, independent community and savings institutions and government

institutions. PSG clients typically commit to multiyear contracts that provide recurring revenuesbased on underlying payment transaction volumes. Solutions in this segment include electronicfunds transfer and network services; card solutions; item processing and output services;ePayment solutions; retail solutions; government payments solutions.

International Solutions Group

ISG provides local services to clients in more than 100 countries around the world. The servicesdelivered by FIS in these locations include many of the same financial and payments solutions inNorth America. These include core banking applications, channel solutions, debit credit andprepaid card and merchant services, wealth management services, item processing, check riskmanagement solutions to financial institutions, card issuers, commercial enterprises andgovernment operations. Capco's operations outside of North America are included in ISG,providing the same integrated consulting described above under FSG.

FIS has seen a healthy growth of revenue over the last ten years. The primary business contribution in the past hasbeen from its Payment Solutions Group at 40% of revenue share in year ending 2013, followed by FinancialSolutions Group at 39%, and International Solutions Group at 21%. However consecutive FIS annual reports showa declining share from Payment Solutions Group from 45% in 2007 to 39% in 2014. However Payment SolutionsGroup still has the highest operating margin of 40% in 2014 amongst its three primary Groups. (Source FIS AnnualReports, Graphics TCM)

Sunguard overview

The entity knows as SunGard is owned by private equity investment funds associated with SilverLake Partners, Bain Capital, Blackstone Group, Goldman Sachs Capital Partners, KohlbergKravis Roberts, TPG Capital and Providence Equity Partners. Sungard is a software andtechnology services company and has two segments, Financial Systems and Public Sector andEducation. Sungard’s revenue comes from three categories, software, SaaS and cloud,professional and business processing services revenue. The revenue streams are recurring as aresult of running contracts and renewals for software maintenance, rentals, SaaS and cloud.

Software: The revenue represents approximately 40% of total revenue. It is comprised oftraditional software license fees, maintenance and support fees, resale of third party softwarelicenses.

SaaS and cloud: The revenue represents approximately 38% of total revenue. SaaS and cloudofferings are delivered from SunGard data centres. SaaS and Cloud revenue also includesrevenue from proprietary trading algorithms and trade execution network.

Professional and business processing services: The revenue represents approximately 22% oftotal revenue. The profit margin on this revenue stream is comparable to other professionalservices firms but lower than software offerings.

FIS business model

FIS revenue is derived from a combination of recurring technology and processing services,consulting and professional services and software license fees. The majority of its revenue hashistorically been recurring, provided under multiyear contracts that contribute stability to itsrevenue streams. FIS services in general are considered critical to its client operations. Asignificant portion of FIS recurring revenues are derived from transaction processing fees thatfluctuate with the level of deposit accounts and card transactions associated with consumer andcommercial activity. Consulting and professional services revenues are nonrecurring, and salesof software licenses are less predictable, a portion of which can be regarded as discretionary

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spending by its clients.

A continued trend in the financial services industry from which FIS benefits is the migration byfinancial institutions to outsourced integrated technology solutions to improve profitability andrapidly address regulatory challenges. As a provider of outsourcing solutions, FIS benefits frommultiyear recurring revenue streams, which help moderate the effects of yeartoyear economicchanges. FIS consulting services revenue grew at an increased pace in 2014, and the trend willcontinue in 2015. Current market pressures in the financial services industry are driving demandfor consulting and professional services as financial institutions seek to transform theirbusinesses to reduce cost base, innovate, and comply with increased regulatory oversight withregard to information technology and related processes.

FIS gross margin percentage will decline if consulting and professional services revenue growsdisproportionately to its processing and service revenue, which deliver a higher gross margin. Inaddition, as consulting and professional services revenues grow as a portion of FIS overallrevenue, FIS will increasingly have a lower overall percentage of recurring revenue as theseservices are generally nonrecurring. Large global institutions are likely to increase technologyspending to meet competitive pressures after a slowdown during the recent financial crisis years.Consumer preference continues to shift from traditional branch banking services to faster ondemand banking solutions and FIS clients seek to provide a single integrated banking experiencethrough branch, mobile, internet and voice banking channels.

FIS has also seen a healthy growth of profit margins over the last ten years. Its operating income was $1.3 billion inthe year ending 2014, at a 20% margin over revenue, with an approximate healthy CAGR of 45% over the last tenyears. (Source FIS Annual Reports, Graphics TCM)

FIS continues to see demand for solutions in the payments market to deliver faster, convenientpayment solutions in mobile channels, internet applications and cards. FIS believes mobilepayments will grow and partially replace existing payment tender volumes over time asconsumers and merchants embrace the convenience, incremental services and benefits. Mobilepayment volume is growing significantly but does not yet represent a meaningful amount of thepayments market. FIS believes the growth of mobile payments continues to present both anopportunity and a risk.

High profile North American merchant payment card information security breaches have pushedthe payment card industry towards EMV integrated circuit cards as financial institutions, cardnetworks and merchants seek to improve information security and reduce fraud costs. FIS hasinvested in card management solutions and card manufacturing and processing capabilities toaccommodate EMV integrated circuit cards. FIS believes the trend to migrate to EMV cards willaccelerate in 2015. The use of checks continues to decline as a percentage of total payments,which negatively impacts FIS check warranty and itemprocessing businesses, and this trend isexpected to continue. FIS generates revenues from the delivery of bank processing, credit anddebit card processing services, other payment processing services, professional services,software licensing and software related services.

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