-Like two snowballs combining to start an avalanche, First Data has announced that it is acquiring InComm. Specific terms and conditions of the agreement were not disclosed, but the announcement said the transaction is expected to add to First Data’s revenue. Given InComm’s $300 billion in revenue, this is a safe bet. Both companies have had a dizzying history of rolling up a number of other companies in the last few years. First Data could become the most significant player in the prepaid services arena by virtue of this acquisition.



The Deal

With the over $300 million in 2007 net revenues, representing almost $8 billion in retail sales transactions processed in 2007, InComm is one of the U.S.’s largest distributors of gift cards, prepaid wireless products, reloadable debit cards, digital music downloads, content, games, software and bill payment solutions.

First Data serves over 5.4 million merchant locations globally with more than 2,000 card issuers with 27,000 employees. InComm has approximately 500 employees.

“The combination of First Data and InComm propels us into having a holistic prepaid product suite that includes banking products, payroll solutions, closed and open loop gift cards and now expanded distribution,” said Ed Labry, president of First Data Corp.’s USA division. “We look forward to leveraging InComm’s expertise and robust retail network to offer end-to-end prepaid solutions to our retail customers around the world.”

First Data said that InComm’s product and technology advancements have positioned the company for continued international expansion. Currently, InComm provides stored valued product marketing and technology solutions to international markets in Europe and Canada.

Brooks Smith, current president and CEO of InComm, will become the leader of First Data’s Global Prepaid Services division when the transaction closes. “We are pleased to join First Data and are confident that this partnership will deliver even more value to our current customers. Additionally, First Data’s global reach, unmatched scope of solutions and commitment to service excellence will not only enable us to enter new international markets, but also help to expand distribution and deliver innovative prepaid solutions to the small and mid market,” said Smith.

The company said the acquisition is subject to customary closing conditions and regulatory approvals and is expected to be completed in the second quarter of this year.



First Data History

First Data was incorporated in June 1971 to provide processing services to the Mid-America Bankcard Association of Omaha, Nebraska, a non-profit bankcard processing cooperative. First Data had 110 employees and $2 million in annual revenues the first year of operation.

In 1980, American Express Information Services Corporation bought 80% of First Data, and the rest over the next three years. In June 1983, First Data was spun off from American Express and finally went public in 1992. A merger with First Financial Management Corp. led to a company with three major business units, including Western Union.

First Data continued to expand, both in the U.S. and overseas with operations in United Kingdom, Australia, Mexico and Canada. During this period, First Data also grew the network of Western Union agent locations.

Beginning in 2001, First Data had a series of acquisitions, including a $6.6 billion merger with Concord EFS in 2004. This merger added the STAR Network and expanded First Data’s PIN-based debit acceptance to more than 1.9 million ATM and retail locations.

In January 2006, after a weak performance throughout 2005, First Data announced its intention to spin off Western Union into an independent publicly traded company.  The move was a surprise, since Western Union accounted for much of the company’s profits.  Ric Duques, First Data’s CEO at the time, said that First Data had to focus its efforts, and decided that the growing card business had more potential for the future.

In early 2007, First Data announced that it had received an offer earlier to sell the company to a private equity firm for $29 billion. The agreement allowed First Data to invite other investors to try and beat the offer. In April, Duques announced that a New York private equity firm, Kohlberg Kravis Roberts & Co., had offered approximately $29 billion. The transaction was completed in September 2007 and Duques retired.

Previously publicly traded First Data became a private company when the transaction closed.



InComm History

InComm was founded in 1992 as a provider of prepaid long distance services and technology, like POSA terminals.

It grew its operations, leveraging its technological expertise, into prepaid wireless, debit cards and gift cards.  In 2006, InComm had a retail presence in over 75,000 locations when it acquired KwikSystems, Prepaid Enterprises and PRE Solutions, all in  February of that year. By adding KwikSystems and PRE’s 60,000 retail locations, InComm became one of the largest U.S. prepaid distributors.

PRE Holdings was an Atlanta-based company with a broad range of prepaid products, including prepaid wireless airtime, long-distance cards, gift cards, music downloads, ringtones and online games. PRE also provided the Mio Money Prepaid MasterCard to over 60,000 retail locations including grocery stores, discount dollar stores, travel centers and convenience stores. In March 2006, InComm acquired a majority interest in AirTime Technologies, another company with POS prepaid and debit transaction solutions.

But, InComm was not finished snowballing yet. In October of the same year, 2006, InComm acquired Canadian-based prepaid calling card provider, DataWave. DataWave had a network of 10,000 retail locations and 6,000-plus point-of-sale-activation terminals located in Canada and the U.S. InComm integrated this into its existing network of more than 145,000 retail locations.



Future of First Data

If you look at the two businesses, said Mark Herrington, current president, First Data Global Prepaid Services, “You really get excited about an opportunity where there is virtually no overlap.”

Herrington said this leaves a tremendous amount of opportunity in a couple of areas.  “First Data’s footprint is in the merchant community, large to small, so there is tremendous opportunity to expand distribution of the InComm products,” he said. “Through our current relationships, prepaid is one of the fastest growing categories in retail.  Since Michael Cappella has taken over as CEO, he has been looking for opportunities to provide higher value solutions to clients.” Cappella took over the reins of First Data when Duques retired.

“We certainly think this represents one of those opportunities,” added Herrington.

One industry observer, Tim Sloane, Director of the Debit Advisory Service for Mercator Advisory Group, sees the combination as a ”natural fit “ for First Data, one of the largest in-store gift card processors and acquirers.  He speculated that First Data may have been frustrated by their inability to create their own gift card distribution business, so they looked for a short cut.

“I have to believe the only reason it took so long was that First Data thought they could launch a competitive offering using internal resources, but then discovered that they couldn’t get the initiative off the ground,” said Sloane.

Sloane said that he thinks that Comdata will be frustrated at losing this deal, and may look elsewhere.  But, he noted that Safeway sounded happy with its Blackhawk distribution unit in its quarterly report, and may be unlikely to be interested in selling it to Comdata or to anyone else.

“So, now the challenge for First Data is to keep their hands off of InComm so it can continue to grow,” advised Sloane. “First Data will be a great channel for the InComm product, I just hope that First Data recognizes that it needs to avoid any approach that might make issuers uneasy.”