The CEO struck pay dirt when a relic called Western Union turned out to be worth a fortune. Now he’s asking investors to reward his growth with a higher multiple.
By Jeffrey Kutler
January 2001
Institutional Investor Magazine
If First Data Corp. isn,t a first mover, then no company is. Its Western Union Holdings subsidiary, famed for the tap-tapping of its telegraph machines in dusty railroad stations in countless old movies, has been moving money electronically since 1871.
The telegram may be history, but Western Union, now focused on retail money transmission services, is a healthy and growing $2.3 billion business. Henry (Ric) Duques, chairman and chief executive officer of FDC, points out that this represents more than 40 percent of the parent company’s total revenues. The other $3.3 billion comes from credit card and other transaction-processing services for banks and retailers , a niche in which, like Western Union,s, FDC has the top market share.
But Western Union is the growth star, paced by its non-U.S. business, which is increasing 40 percent a year on a revenue base of $800 million. That’s quite a turnaround from a decade ago, when an independent Western Union teetered on the edge of bankruptcy.
And owning Western Union, with its highly recognizable consumer brand, brought big changes to Duques and Atlanta-based FDC. They were accustomed to toiling in relative obscurity even as they served hundreds of millions of MasterCard and Visa customers, indirectly, on behalf of their banks. Established in 1971 in Nebraska as First Data Resources, the company was acquired by American Express Co. in the early 1980s, then was spun off in a 1992 IPO. Duques, 57, has been CEO since 1987.
Western Union arrived as part of FDC’s $6.6 billion 1995 takeover of rival First Financial Management Corp. Although it wasn,t the main target in the purchase, Western Union proved to be in the right place at the right time. In the late 1990s, demand for money transfers exploded, whether from parents sending emergency cash to children at college or from expatriate workers sending earnings back to just about anywhere, from Belize to Belarus.
Securities analysts are generally upbeat about FDC’s stock, which has recently been trading in the high 40s and low 50s without suffering the wild swings of technology shares. But Duques is laboring to lift the price-earnings multiple from the high teens. That might be good for one of his client banks, but Duques thinks it should be at least double that , closer to such computer and transaction services companies as Automatic Data Processing, where he formerly worked as group president of financial services. ADP’s P/E is 47, and its market cap of $39 billion exceeds FDC’s by $17 billion.
To be sure, there is much more to the story than Western Union. Payment services continue to grow, albeit more slowly. FDC has also moved aggressively into e-commerce, and not simply by extending traditional card services to the Internet. It is funding new online-payments ventures through eONE Global, a partnership it formed in November with iFormation Group, which in turn is owned by Boston Consulting Group, General Atlantic Partners and Goldman Sachs Group.
In trying to meld past and future, Duques’s work could be a case study for The Victorian Internet, a 1998 book by U.K. writer Tom Standage that has recently gained a high-tech following by drawing parallels between the 19th-century struggles in the telegraph industry and those of today,s e-businesses.
In an interview with Institutional Investor Assistant Managing Editor Jeffrey Kutler, Duques discussed how he envisions the current mix of businesses falling into place.
Institutional Investor: What is it like to run such an old company?
Duques: Funny you should ask. We,re going to have a big 150th-birthday party this year for Western Union. Its international division is now the fastest-growing part of our company. Forty percent growth is pretty good for a 150-year-old company.
How does companywide growth compare with that?
We think we can grow both revenues and earnings per share from continuing operations in the 13 to 16 percent range. Western Union as a whole would be in the high teens to 20 percent.
How important is international business to overall strategy?
For Western Union, it is extremely important. It accounts for $800 million of FDC’s $1.1 billion in international revenues. It’s growing so fast because the number of agents outside the U.S. has increased to 54,000, from 7,500 in 1995, and they,re in 182 countries. And what used to be normal traffic patterns , Mexicans coming to work in the U.S. or Turks working in Germany , have been accelerated by the fall of communism and other geopolitical changes. Western Union’s agent in Israel, for example, is the post office. Its business has doubled every year for the past four years because in the 1990s 800,000 Russians moved to Israel. When they get jobs, they go to the post office and wire money back to Moscow.
Did you see all that coming when you first took control of Western Union?
No. We knew there was an opportunity there, but really the planets were aligned. When we saw what was happening, we started to build faster and promote faster. Within the U.S. we have 43,000 agents; the rest of the world can handle a lot more than the 54,000 agents out there. It’s a matter of repeating the recipe, like putting up another McDonald’s franchise. A good example is Asia. When I look at China, India, Japan and the Philippines, I see billions of people. We,re underrepresented, but that’s changing.
Did the consumer branding aspect of Western Union require a change in mind-set?
Every year at budget time, the card-issuing business and other divisions would come in with capital requests. Now we have Western Union with very little need for capital, but they ask for $150 million for advertising and promotion. That’s a tougher spend than many of us were familiar with. But there are people in senior positions who have been with Western Union for years and years, and we listen to them. We steadily put 7 to 8 percent of their revenues into advertising and promotion.
How are the other transaction businesses growing?
The merchant business, where we serve the retailer, is in double digits. Card issuing had a 5 percent target in 2000, and we haven,t given guidance for 2001. The industry is consolidating, and if one of our clients gets acquired, as Associates First Capital was by Citigroup, we lose revenues. Offsetting that is tremendous growth in retail-store cards, which GE Capital has outsourced to us, and in debit cards. And the overall pie of transactions is getting larger.
Why aren,t the overseas card businesses growing as fast as Western Union?
There is a lot of potential growth, but it takes a huge amount of time and energy. We just penetrated Japan in a joint venture with NTT Data and DC Card. We have gotten into Canada, Germany, Spain and Australia. But the big kick for us is beyond the next year or two.
What is the strategic significance of the eONE partnership with iFormation Group?
It has actual operating businesses: SurePay, a B2B platform; and CashTax, for business-to-government electronic payments. Together they,re $80 million in revenues, and we,ve told the outside world not to expect any material positive or negative revenues or EPS growth contribution until 2002. Our partners are enthusiastic. They take a global view and realize that the payment infrastructure on the Internet is just now being formulated, and we are in an ideal position to be part of that. You,ll see us creating joint ventures with leaders in the B2B space.
Do you think the eONE announcement helped your stock rise when other tech companies were falling?
It’s true, we got far more positive than negative opinions. The neutral ones were, “It sounds reasonable, but we,ll wait and see,” which is fine with me. What we didn,t want was to have it viewed as a mutual fund, where we,d take 2 percent of this and 5 percent of that. This is an operating company; the deals we make will be significant, and we,ll be a major operator.
Do you see a problem in the way the markets perceive First Data?
They don,t fully appreciate that we are as significant as we are in each segment that we,re in. We are No. 1 in card, No. 1 in merchant and No. 1 with Western Union. I doubt that even General Electric is No. 1 in every business that it’s in. In the past we had a problem of focus, and we worked two and a half years to prune ourselves down by selling such businesses as health claims and mutual fund processing. Also, people should appreciate that Western Union’s 40 percent international growth next year means more than $300 million; most computer services companies don,t have that much in revenues. Looking at our numbers and recent growth rates, we compare ourselves to ADP. I don,t begrudge their multiple in the 40s; I just think we should be closer to that.
