When I look at the behaviour of some business leaders, I realize that this desire to copy others doesn’t always fade over time. It certainly manifests itself differently, but often remains present.
In his letter to Berkshire Hathaway shareholders written in 1989, Warren Buffett called this phenomenon the institutional imperative. He wrote that the behaviour of companies operating in the same industry will often be imitated without much thought. This is usually the case when a company announces a major acquisition. The story involving Fiserv (FI), Fidelity National Services (FIS) and Global Payments (GPN), three companies operating in the payments industry, is clear.
In January 2019, Fiserv announced its intention to acquire First Data. This major acquisition of US$39 billion allowed it to extend its service offering in a whole new segment, that of payment acceptance. Fiserv thus became a major global player offering solutions in several areas of the payment industry.
This transaction triggered a series of similar acquisitions. In March 2019, Fidelity National agreed to acquire the company Worldpay; in May 2019, Global Payments agreed to acquire TSYS.
What is surprising about these acquisitions is that the three competing companies have acquired very similar complementary companies. Also, the transaction dates were close together. This story makes me feel like Fidelity National and Global Payments literally imitated Fiserv. They bought the “same thing”, practically at the same time.
We can certainly explain this behaviour by the desire to remain competitive. However, I wonder about the merits of these acquisitions. Were they rational? Were they made with a sense of urgency? Was the price paid fair? According to my analysis, Fiserv paid nearly 12.0 times operating profit while Fidelity National and Global Payments paid nearly 50% more, or multiples of 19.0 times and 17.0 respectively.
In my opinion, the leaders of Fidelity National and Global Payments have been under immense pressure – “institutional” pressure. Imagine that you are the leader of Fidelity National or Global Payments and you choose not to follow Fiserv. You will find yourself in a very bad position if the Fiserv’s acquisition becomes a runaway success. Come to think of it, who can blame executives for making a mega acquisition if everyone else is making one? That’s a great way to keep your job, isn’t it?
In retrospect, the decision to copy Fiserv was not a success. Fidelity National recently announced that it had sold half of Worldpay, admitting that this acquisition had been a failure. In 2019, it paid nearly US$43.0 billion, while the recent sale now pegs its value at nearly US$18.5 billion, a loss of just over 50%. Unsurprisingly, Fidelity National’s financial and stock market performance was disappointing. The day before the announcement of the acquisition, the stock was trading at $109; four years later, it is trading at $58.
As for Global Payments, it managed to generate earnings growth which, however, was not reflected in its stock price. The day before the announcement, the stock was trading at $148 compared to $128 today.
Conversely, the acquisition by Fiserv seems to have been a better success as profits have more than doubled since the acquisition. What’s more, the stock price has risen from $75 the day before the announcement to over $126 today.
I am watching with interest the current craze in the artificial intelligence sector. In my opinion, it would not be surprising to see several companies making similar acquisitions to imitate their competitors. Will we witness a wave of “institutional” pressure?
In closing, I think we have to be careful when we see business leaders imitating their competitors. Imitating can be a good strategy, as long as it remains based on good reasoning.
