Glaringly, during a solid showing on Wall Street, financial technology (fintech) provider Fidelity National Information Services (NYSE:FIS) suffered a terrible case of the Monday blues. Earlier this morning, news broke that the company would spin off its merchant payments business Worldpay. Essentially, the move represented a tacit admission that the 2019 acquisition didn’t pan out. Subsequently, FIS stock dropped nearly 14% in early afternoon trading.
According to Barron’s, Fidelity National expects the tax-free spin-off to be completed within a year. Further, the two companies will maintain a commercial relationship. Conspicuously, Fidelity National acquired Worldpay for $43 billion. At the time of the acquisition, the fintech player stated that the combination will create a global leader in technology and solutions for merchants, banks and capital markets.
Now, management sees circumstances much differently. “In evaluating a broad range of alternatives as part of our previously announced comprehensive assessment of FIS’ strategy, businesses, operations, and structure, FIS management and the Board concluded that the spin-off of Worldpay will unlock shareholder value by improving both companies’ performance, enhancing client services, and simplifying operational management,” said Jeffrey A. Goldstein, Chairman of the Board.
Further, Goldstein added, “We are confident that this is the right time for the separation of Worldpay. The pace of disruption in payments is rapidly accelerating, requiring increased investment in growth and a different capital allocation strategy for our Merchant Solutions business.”
FIS Stock Under Significant Pressure
As Financial Times mentioned, FIS’ acquisition of Worldpay represented a response to a deluge of wheeling and dealings. Notably, this includes the acquisition of First Data by fintech provider Fiserv (NASDAQ:FISV). Starkly, while FISV gained about 15% for the year, FIS stock now finds itself down more than 5% below parity.
As stated earlier, the initial concept behind the Fidelity National-Worldpay combo centered on a mutually symbiotic relationship in an industry where companies compete for footprint size. Unfortunately, the payments arm struggled since the takeover, making the acquisition price look steep.
Indeed, investment resource Gurufocus notes that discounted cash flow (DCF) analysis for FIS stock yields a fair value of $22.58. At the time of the analysis, FIS featured a price per share of $65.09. Therefore, Gurufocus deduced a margin of safety of 185.61% below breakeven. In other words, as circumstances stand right now, Fidelity National pings as wildly overvalued.
Perhaps inevitably, then, the fintech firm attracted criticism from activist investors DE Shaw and Jana Partners. Per FT, they called on the company to review its business strategy, including considering undoing the 2019 deal. Also, according to the business news agency, FIS stock dropped 45% since its Worldpay acquisition.
Almost as an afterthought, Fidelity National reported its fourth-quarter earnings on Monday. For both adjusted earnings and revenue targets, the company narrowly edged past consensus estimates. Unfortunately, it mattered little for FIS stock, in part because management disclosed a full-year earnings forecast below analysts’ expectations.
Why It Matters
Despite the red ink in FIS stock, not everyone is pessimistic about the underlying enterprise. Going against the grain, Barron’s reported that Raymond James analysts stated that the sum-of-the-parts math was “simply too compelling to ignore.” Therefore, they placed a “strong buy” rating on Fidelity National shares.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.