How activist Elliott can help Global Payments lift its share price

Company: Global Payments Inc (GPN)

Business: Global Payments is a payments technology company delivering software and services to its customers globally. Through its Merchant Solutions segment, it provides payments technology and software solutions globally to small-and-medium sized businesses and select mid-market and enterprise customers. It offers authorization, settlement and funding services, customer support, chargeback resolution, reconciliation and dispute management services, terminal rental, sales and deployment, payment security services, consolidated billing and reporting. It offers an array of business management software solutions that streamline business operations to customers in numerous vertical markets. Through its Issuer Solutions segment, it provides financial institutions and retailers technologies to manage their card portfolios. It provides flexible commercial payments, accounts payable and electronic payment alternative solutions that support B2B payment processes for businesses and governments.

Stock Market Value: $19.98B ($81.93 per share)

Activist: Elliott Investment Management

Ownership: n/a

Average Cost: n/a

Activist Commentary: Elliott is a very successful and astute activist investor. The firm's team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, the firm also hires specialty and general management consultants, expert cost analysts and industry specialists. Elliott often watches companies for many years before investing and has an extensive stable of impressive board candidates. The firm has historically focused on strategic activism in the technology sector and has been very successful with that strategy. However, over the past several years its activism group has grown, and Elliott has been doing a lot more governance-oriented activism and creating value from a board level at a much larger breadth of companies.

What's happening

Elliott has taken a position in Global Payments.

Behind the scenes

Global Payments is a leading provider of payment processing and software solutions, focused on serving small and medium-sized merchants and select mid-market and enterprise customers. The company operates through two segments: Merchant Solutions and Issuer Solutions. Merchant Solutions, contributing about three-fourths of total sales, provides payment solutions to enable customers to accept card, check, and digital payments, offering authorization, settlement, funding and other services. Simply put, Global Payments, as a merchant acquirer, acts as a middleman between the merchant and card network to authorize and facilitate transactions. Through its Issuer Solutions segment, Global Payments provides comprehensive commerce solutions supporting the payment ecosystem for issuers through offerings like core processing, enterprise tokenization and more. This segment was formed in 2019 following the combination of Global Payments and Total System Services (“TSYS”) in an all-stock merger of equals to create a leading payments company with a presence in both merchant acquiring and issuer services.

Peaking in 2021 at roughly $220 per share and an enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple of about 25-times, the company today trades around $80 per share and at a high single-digit multiple. The company managed to tread water during the pandemic despite the global slowdown in transactions and its focus on small and medium enterprises. However, sales growth has slowed significantly since 2020, now below the core acquiring market's high-single growth rate, implying market share loss to disruptors like Stripe, Fiserv's Clover, Shopify and others. That is all very interesting, but not what this activist campaign is about. This is about a company that made a poorly received “bet the farm” acquisition and is now at an inflection point that will determine its future.

On April 17, Global Payments announced that it had agreed to acquire Worldpay from Fidelity National Information Services (FIS) and private equity firm GTCR. The three-way cash-and-share acquisition also involved Global Payments divesting its Issuer Solutions (previously known as TSYS) business to FIS in a deal which valued Worldpay at $24.25 billion and Issuer Solutions at $13.5 billion. Global Payments' shares fell 17% following the announcement for many good reasons: (i) this acquisition was announced after management's commitments at their 2024 Investor Day to pursue increased shareholder returns, divestments, and, at most, small bolt-on acquisitions, (ii) management has a poor track record of integrating (or failing to integrate) acquisitions such as TSYS and AdvancedMD, and (iii) the company paid too much for Worldpay – acquiring it at 10.5-times EBITDA versus the 6.5-times multiple Global Payments trades at. Moreover, investors have grown skeptical of deals of this sort in the payments space after two of the three largest deals made in a 2019 wave of consolidation have been unwound (Global Payments – TSYS and FIS – Worldpay).

But the good news is that failure is priced in. Management thinks the Worldpay transaction makes strategic sense for Global Payments, simplifying its business model into a pure-play commerce solutions provider, and that it will provide $600 million in annual cost synergies and $200 million in revenue synergies. The market is not believing this or has little faith that management can achieve these synergies. From where the stock trades today, if management can come anywhere close to achieving these synergies and executing on this transaction, it will be a nice return for stockholders. What this company needs right now is help in execution and enhanced credibility, and Elliott can provide both.

There are companies that could use shareholder representation on the board and companies that need it. Global Payments is much closer to the latter. A reconstituted board that holds management accountable, commits to an M&A moratorium and adds members with experience integrating large acquisitions will almost immediately restore investor confidence in the company. Thereafter, the board can start to de-lever and possibly buy back shares at the appropriate time if Global Payments' stock is still significantly undervalued. We would also expect the board to do the most important thing boards do – oversee and evaluate senior management, but we do not think there would be any material management changes ahead of such a large acquisition like this.

Given the almost universal opposition to the Worldpay acquisition and the low investor confidence in management, we would expect that Elliott will be able to walk onto this board with any reasonable slate. In a contested situation for the 10-person unitary board using a universal proxy card, Global Payments would almost certainly face significant defeat. Elliott recently won two of four seats at Phillips 66 in a proxy fight with a much higher degree of difficulty. The fund made its reputation as an activist almost two decades ago as primarily a strategic activist in technology companies, making great returns getting companies sold or participating in the acquisition. However, Elliott has since evolved into a much broader and comprehensive activist in strategy, sector and geography. Today, the firm often does its best activism from the board level. We believe that a reconstituted board that includes an Elliott representative will restore investor confidence and increase the probability of a successful integration of Worldpay.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.