In February, processing company TSYSannounced that it would buy prepaid program manager NetSpend forapproximately $1.4 billion in cash. The deal was expected to closesometime in the middle of the year, according to the initial pressrelease announcing it.
Last week, NetSpend announced that it would move its specialstockholders meeting about the proposed merger to June 18 “in orderto provide additional time for the submission and consideration ofunsolicited alternative acquisition proposals.” NetSpend alsoannounced changes to the original agreement including a reductionin the fee NetSpend would pay to TSYS if the agreement isterminated from $52.6 million to $44 million and a reduction in thematching period for the notice to TSYS before “NetSpend may enterinto a Superior Proposal.”
Reading into this then, NetSpend may have a better offer than theone it received from TSYS. The question is who might have made acompeting bid. While Mercator has no knowledge of the negotiations,based on general industry knowledge, we believe there is a likelyshort list of potential bidders. This list was generated byconsidering whether a company had a strategic interest in a prepaidprogram manager and the size to compete with the TSYS bid:
1. FIS: Like TSYS, FIS is apayments processor that has been involved in the prepaid space andcould desire a program manager to improve its competitive positionas it tries to expand its prepaid business with its financialinstitution clients. FIS may view NetSpend as a shortcut toestablishing a strong competitive position in a business they arealready building.
2. Google: With its purchase of prepaid processorTxVia in 2012 and its mobile wallet, it is clear that Google has astrong interest in the payments business. Google may see NetSpendas a way to extend its payments business and reach into a broaderaudience for alternative payments.
3. PayPal: NetSpend and PayPal already have aconnection, because NetSpend is the program manager for PayPal’sprepaid card for spending in the offline world. PayPal may havedecided that owning NetSpend is the best way for it to expand itspayments offering beyond just enabling onlinecommerce.
Thislist does not include any banks, though it is possible that one ofthe large banks may have seen an opportunity to use NetSpend tolaunch a prepaid program or catapult their existing business to thenext level. This list of possible banks with the wherewithal tocompete for NetSpend is longer, but it is not clear whether itwould be a bank with an existing program that wants to expand or acompany that wants to catch up with the market. That said, here aresome possibilities:
1. Capital One: NetSpend hadentered an agreement to be acquired by Capital One in 2007. Thedeal was later cancelled for reasons that were never fullyrevealed. Capital One shut down its internal general purposereloadable prepaid card program on March 31. This may make CapitalOne a dark horse, or it may be that Capital One decided thatprepaid was a card type it couldn’t ignore and so decided to returnto an old companion.
2. Bank of America: When it comes to prepaidcards, most of Bank of America’s activities have been on thecommercial side with payroll and other business-focused cards.Seeing competition from Chase and American Express, Bank of Americamay have decided that it was time to make a big jump into consumerprepaid cards.
3. Citi: Like Bank of America, most of Citi’sactivities have been on the commercial side with payroll and otherbusiness-focused cards. Chase and American Express may haveprompted Citi to make a bid for NetSpend.
The future of the prepaid business will be shaped by how this dealis finalized. We may see the beginnings of banks taking over theprepaid business. Alternately, technology companies may use prepaidto push the market in a new direction that works across platformsand delivers payments through new form factors.