In a move designed to strengthen its capabilities for integrated payments, processor and technology provider Total System Services has agreed to acquire Cayan, a company which has long focused on providing merchants with expanded software tools for all consumer-engagement channels, for $1.05 billion.

The news shortly follows another deal valued in the billions — Thales agreeing to buy the chip maker Gemalto for $5.4 billion. Both deals are major bets on specialties that their acquisition targets have spent considerable effort honing. For TSYS, the Cayan deal gives it a stronger offering for merchants with more complex needs. For Thales, Gemalto's ambitions to diversify its security tools fit well with its ambitions to blend authentication with artificial intelligence.

TSYS strengthens its arsenal for integrated payments

"Our primary focus over the past year has been in the merchant segment, and the acquisition of Cayan clearly hits the center cut of that target," TSYS' chairman, president and CEO, Troy Woods, said during a Monday conference call announcing the deal.

TSYS' chairman, president and CEO Troy Woods
"Our primary focus over the past year has been in the merchant segment, and the acquisition of Cayan clearly hits the center cut of that target," TSYS' chairman, president and CEO Troy Woods said.

Cayan, previously known as Merchant Warehouse, provides technology to more than 70,000 merchants and has relationships with more than 100 integrated payments partners in the U.S. It has specialized in delivering its Genius platform, a payments and commerce omnichannel service it has developed and enhanced for nearly seven years.

"On the sales channel," Cayan "has traditional acquiring and a direct sales force that will be an easy transition between our teams, and they have what they call their partner channels, which is integrated with a real specialization across retail verticals," Philip McHugh, senior executive vice pesident of merchant services for TSYS, said during the call. "We see that as a huge strength and we will want to expand on that and also get our integrated teams working with Cayan as a product solution to expand it."

What does TSYS get out of the acquisition?

  • TSYS has been vocal in its ambitions to be "the leading payment solutions provider to small and medium size businesses in the United States." Given Cayan’s focus on this space, the acquisition assists this goal considerably.
  • The Cayan acquisition also provides immediate access to a swath of verticals where TSYS has had limited penetration. "We're a leader in health, we're a leader in salon and wellness and in a few other things like charitable giving in government. Cayan is very, very strong in specialty retail. They're very big in pharmacy distribution as well, which bolsters our health," McHugh said.
  • TSYS now owns Cayan’s Genius Platform, an integrated and customizable cloud-based payment solution, described by McHugh as easy to integrate and work with, omnichannel in integrating with card present terminals and card not present and "built on the right technical architecture ... that’s scalable and nimble." McHugh also conceded on the call that the existing TSYS software integration platform is "good but it's not great."
  • Cayan may provide a launchpad for TSYS into Europe and other regions. Cayan has an existing development operations team in Belfast, North Ireland, which could be leveraged as a beachhead in Europe. However, McHugh states, "I know Europe very well, but that is not on the cards at the moment."

Cayan currently operates as a portfolio company of Parthenon Capital Partners. TSYS considers the acquisition of that will put the company in the forefront of integrated payment services.

"In terms of who competitors are, they have a very competitive gateway and bring it in at scale, plus multiple SMBs, and they have brought in some larger national brands," McHugh said of Cayan. "So we are able to go after all of the large traditional competitors. If you think about who are some of the perceived leaders in integrated in the market, we now have a more competitive offer than those companies out in the market today."

The TSYS board has approved the transaction, which is expected to close during the first quarter of 2018, subject to regulatory approvals and customary closing conditions.

The acquisition does not change anything for TSYS in terms of future moves, chief financial officer Paul Todd said during the call.

"This acquisition solidifies all of the strategic things we have been talking about as it relates to M&A priorities of merchant acquiring and specifically the integrated and omnichannel nature of merchant acquiring," Todd said. "We do have interest in making acquisitions in our issuing business as well, so our priorities are not changing."

"But this is a fulfillment of one of the key strategic objectives we have had on the M&A front." Todd added.

Bank of America Merrill Lynch and Greenhill & Co. LLC are acting as financial advisers and Alston & Bird LLP are legal advisers to TSYS.

Thales buys into Gemalto's vision for security

Dwarfing the TSYS deal is an international acquisition: Thales is spending $5.4 billion in a friendly bid to buy Gemalto, topping last week's offer by French IT giant Atos for $5 billion, a price Gemalto said undervalued it.

Thales, a larger company, has already spent more than $1 billion over the past three years to expand digital security and centralize hardware monitoring, and sees its expertise in artificial intelligence as complementary to Gemalto's strong digital authentication technology.

Thales hopes the acquisition will enable it to sell a broad range of digital security to protect mobile, cloud and Internet of Things deployments to corporate and government clients.

Gemalto is much more open to Thales' potential ownership than Atos; besides scoffing at the price, Gemalto said Atos did not present a plan that was more beneficial for Gemalto than if it had remained a standalone company. Gemalto's board has decided to unanimously support Thales' bid, and Patrice Caine, Thales CEO, suggests Thales and Gemalto were already working on a deal.

"We have been investigating the merits of Gemalto for 12 months, there is a real opportunity for a combination," Caine said during a conference call on Monday morning in Europe. "Talks started a few months ago. This offer is friendly."

Thales plans to roll Gemalto's technology into a broad-based service to protect what Thales calls digital decision chains, or the path data travels from the time it is created at "sensors" to real-time decision making. That would include transactions executed by mobile devices and connected devices, putting the Thales/Gemalto combination in a position to sell to enterprises that are in the midst of planning a transition to a mobile/cloud model environment for authentication, transaction execution and analysis.

For example, Gemalto's strong digital authentication combined with Thales' AI could detect abnormal patterns and behaviors signaling fraud through a process called "silent authentication," Caine suggested.

"Gemalto brings the digital authentication to create what is called silent authentication, which is clearly a very, very promising manner to augment the level of security in the payment field," which could drive fresh revenue opportunities, Caine said.

Gemalto's security tools also look promising for work Thales already is doing in developing operating systems for self-driving cars, he added.

Thales previously acquired Sysgo, Vormetric and Guavus over the past three years for a total of about $1 billion to build a range of connectivity, cybersecurity, data analytics and artificial intelligence, a strategy that will accelerate due to its Gemalto purchase.

"We have addressed some of these technologies, and more recently launched a dedicated structure to address key initiatives in the group," Caine said.

Gemalto sells EMV and SIM cards, but it also sells access control technology such as biometrics, security and monetization services for IoT deployments, boosting Thales' addressable markets for these services.

Thales' acquisition would also accelerate a move beyond EMV chip cards for Gemalto, whose profit margin has slumped over the past year as worldwide EMV sales wane.

"We will combine Gemalto with our security assets," Caine said. "This new business unit will serve the fast-growing digital security markets. This transition is very positive for Gemalto."

The acquisition is expected to close in the second half of 2018, and Thales will have the chance to respond to any other offer Gemalto may receive.

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Corrected December 18, 2017 at 5:18PM: An earlier version of this story misattributed quotes from Philip McHugh.

Nick Holland

Nick Holland

Nick Holland is a Senior Analyst at PaymentsSource. He has previously held analyst roles at Javelin Strategy & Research, Yankee Group and Aite Group.
Kate Fitzgerald

Kate Fitzgerald

Kate Fitzgerald is an Arizona-based senior editor for PaymentsSource.