Fidelity National Information Services (FIS)

• The Bottom Line: FIS is the essential but often invisible 'plumbing' of the global financial system, offering a potential turnaround opportunity for patient value investors as it refocuses on its core, high-margin businesses after a challenging acquisition.
• Key Takeaways:
• What it is: A financial technology (FinTech) giant that provides the core software and systems that banks, merchants, and capital markets firms use to operate.
• Why it matters: It possesses a powerful economic_moat based on high switching costs, but its stock has been punished by the market due to a costly acquisition and subsequent strategic shift, creating a potential gap between its market price and its intrinsic_value.
• How to use it: Analyze the company as a special situation, focusing on the value of its streamlined core business post-divestiture and assessing whether Mr. Market's pessimism has created a sufficient margin_of_safety.

Imagine your city's water system. You don't often think about the massive, complex network of underground pipes, pumps, and treatment plants. You just turn on the tap and expect clean water to flow. You don't see the infrastructure, but your daily life would grind to a halt without it. Fidelity National Information Services (FIS) is the financial equivalent of that hidden infrastructure. It's one of the world's largest providers of the “plumbing” for money. When you swipe your credit card, transfer money between bank accounts, or check your account balance on a banking app, there's a good chance FIS technology is working silently in the background to make it happen. They don't operate the consumer-facing brands you know, like Chase or Bank of America. Instead, they are a B2B (Business-to-Business) company. Their customers are the financial institutions themselves. FIS provides them with the mission-critical software and services they need to function. Historically, their business has been broken down into three main segments:

• Banking Solutions: This is the company's traditional heart. FIS provides the “core processing” software for thousands of banks, especially small to mid-sized ones. This software is the bank's central nervous system—it manages customer accounts, processes deposits and withdrawals, and calculates interest. It's incredibly “sticky,” meaning banks are very reluctant to switch providers because the process is immensely costly, complex, and risky.
• Merchant Solutions: This segment, largely built through the massive 2019 acquisition of Worldpay, helps businesses of all sizes accept digital payments. When you tap your card at a local coffee shop, the technology that securely routes the payment from your bank to the shop's bank is what this division does. ¹⁾
• Capital Market Solutions: This division serves investment banks, asset managers, and hedge funds. It provides the software they need for trading, risk management, and back-office operations.

So, in simple terms, FIS isn't the flashy bank on Main Street; it's the robust, complex, and indispensable operating system running in the background, ensuring the global flow of money is secure and efficient.

“The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they're on the operating table.” - Warren Buffett

For a value investor, a company like FIS is fascinating not just for what it is, but for what it has become in the eyes of the market. It represents a classic case study in several core value investing principles. 1. The Power of a Wide Economic Moat: Benjamin Graham and Warren Buffett taught that the best businesses have a durable competitive advantage, an “economic moat,” that protects them from competitors. FIS's core banking business has a formidable moat built on high switching costs. A regional bank can't simply decide to switch its core processing system like you switch your mobile phone provider. It's a multi-year, multi-million dollar undertaking that risks massive operational disruption and customer loss. This “stickiness” gives FIS a predictable, recurring revenue stream and significant pricing power, hallmarks of a high-quality business. 2. Mr. Market's Emotional Swings: In 2019, FIS made a colossal $43 billion bet by acquiring Worldpay, a leader in merchant payment processing. Wall Street initially cheered the deal. However, integrating the two behemoths proved difficult, synergies failed to materialize as hoped, and the merchant business faced tougher competition than the core banking segment. mr_market, in his typical manic-depressive fashion, swung from euphoria to despair. The stock price was hammered, erasing years of gains. For a value investor, this is a signal. We aren't interested in the market's mood; we are interested in the underlying value of the business. The wide divergence between the business's quality and its stock price is precisely the kind of opportunity we hunt for. 3. A “Special Situation” in the Making: In response to the market's punishment and strategic challenges, FIS announced it would spin off the Worldpay (Merchant) business. This is a classic special situation. Such corporate actions—spin-offs, divestitures, mergers—often create value that the market initially overlooks. By separating the two businesses, FIS aims to:

• Simplify the Story: Allow investors to value the stable, high-margin Banking and Capital Markets business on its own merits.
• Reduce Debt: Use proceeds from the transaction to pay down the massive debt pile accumulated from the Worldpay acquisition.
• Improve Focus: Allow the management of each company to concentrate on its unique market and challenges.

A value investor's job here is to look past the messy headlines and ask: What is the intrinsic value of the new, more focused FIS, plus its remaining stake in the spun-off company? Is that combined value significantly higher than the current stock price?

Analyzing a complex company in the midst of a major corporate restructuring is not a simple task, but it can be broken down into a logical process. This is not a recommendation to buy or sell, but a framework for thinking like a value investor.

1. Step 1: Understand the Spin-Off Mechanics.

This is the most critical step. You must read the company's investor presentations and SEC filings to understand the deal's structure. Key questions to answer: How much of the Worldpay business is being sold versus spun off? How much cash will FIS receive upfront? What percentage of the new Worldpay company will FIS shareholders retain? How will the debt be allocated between the two new entities? You cannot value what you do not understand.

1. Step 2: Analyze the “New FIS” (The Core Business).

Forget the consolidated numbers of the past. Your focus must be on the pro-forma financials of the “RemainCo”—the business that will continue as FIS, consisting of Banking and Capital Markets. Analyze this entity as a standalone business. Look at its historical revenue growth (excluding the merchant segment), its operating margins, its return on invested capital (roic), and its free cash flow generation. Is this a healthy, growing, profitable business?

1. Step 3: Re-evaluate the Moat's Durability.

The high switching costs in core banking are real, but no moat is eternal. Investigate the competitive landscape. Are newer, cloud-native FinTech companies like Jack Henry or Fiserv taking market share? Is the rise of “Banking as a Service” (BaaS) a long-term threat? A value investor must be confident that the core business's competitive advantages will endure for the next decade or more.

1. Step 4: Scrutinize the Post-Spin Balance Sheet.

Debt was a primary reason for the stock's decline. The spin-off is designed to fix this. You must calculate what the balance_sheet will look like after the deal closes. What will the new debt level be? What will the debt_to_ebitda_ratio be? A healthy balance sheet is non-negotiable for a conservative value investor. The goal is to see a clear path to a strong financial position that allows for future growth and shareholder returns.

1. Step 5: Perform a Sum-of-the-Parts (SOTP) Valuation.

This is the perfect tool for a situation like this. Instead of valuing the current messy company, you value its pieces separately and add them up.

  1. **Value "New FIS":** Based on your analysis in Step 2, assign a conservative valuation multiple (e.g., a price-to-earnings or enterprise-value-to-EBITDA multiple) to the estimated future earnings of the core business.
  2. **Value the Worldpay Stake:** Value the new, independent Worldpay company based on its growth prospects and the valuation of its public competitors (e.g., Adyen, Stripe). Then, calculate the value of the stake FIS will retain.
  3. **Add Them Up:** The sum of these two parts gives you an estimate of the company's total [[intrinsic_value]]. Compare this estimate to the current market capitalization. The difference, if positive and significant, represents your [[margin_of_safety]].

Your analysis will lead you to one of two primary conclusions:

• The Bull Case (The Value Thesis): You conclude that the market is unfairly punishing the entire company for the mistakes related to one division. You believe the core Banking and Capital Markets business is a high-quality “crown jewel” that is being obscured by the Worldpay mess. The spin-off will act as a catalyst to reveal this hidden value, and by buying today, you are acquiring this excellent core business at a deep discount.
• The Bear Case (The Value Trap Thesis): You conclude that the problems run deeper. Perhaps the core business is not as strong as it appears and is facing secular decline from more nimble competitors. The debt may remain too high even after the spin-off, and you may have little faith in a management team whose last major act of capital_allocation was a value-destroying acquisition. In this view, the stock is cheap for a reason, and it's a value_trap.

A thorough, rational analysis, free from the market's daily noise, is the only way to distinguish between these two scenarios.

Let's illustrate the value investor's mindset with a simplified tale of two investors looking at FIS: Momentum Mike and Patient Penny. The year is 2023. FIS stock has fallen over 50% from its peak. Headlines are filled with negative news about the Worldpay write-down and the messy divorce.

• Momentum Mike looks at his stock chart. The red arrow points sharply down. He reads a headline: “FIS Stumbles, Announces Spin-Off After Botched Acquisition.” He thinks, “This is a disaster. The trend is down, everyone is selling. I need to get out before it goes to zero!” He sells his shares at a loss, chasing the next hot stock with a chart that goes up and to the right. Mike is a follower of price and sentiment.
• Patient Penny, a value investor, sees the same falling price and reads the same headlines. Her reaction is different. She thinks, “Interesting. A great company in temporary trouble, just as Buffett described. The market hates it, which means it might be cheap. Time to do some homework.”

Penny spends the next week digging into the company's filings. She builds a simple Sum-of-the-Parts (SOTP) model on a spreadsheet:

Penny understands her estimates could be wrong. But the 45% gap between her calculated value and the market price provides a substantial margin of safety. She concludes that even if her valuation is a bit optimistic, she is still likely buying the business for less than it's worth. She decides to initiate a position, knowing she must be patient and wait for the market to eventually recognize the value unlocked by the spin-off. This example highlights the core difference: Mike reacted to the price and the narrative, while Penny reacted to the potential gap between price and value.

Every investment thesis, no matter how compelling, has two sides. A prudent investor must consider both.

• High-Quality Core Business: The core banking solutions segment has a wide, durable economic moat, generating predictable cash flows.
• Clear Catalyst: The Worldpay spin-off is a defined corporate event that can force the market to re-evaluate the company and unlock trapped value.
• Depressed Sentiment and Valuation: The stock is unloved and trades at a valuation far below its historical norms, which is often the precursor to superior returns.
• Debt Reduction: The transaction provides a clear path to a healthier balance sheet, reducing financial risk.

• Execution Risk: Large corporate spin-offs are complex and can face delays or complications. The final terms of the deal could be less favorable than anticipated.
• Management's Track Record: The team that approved the value-destructive Worldpay acquisition is still largely in place. Can they be trusted with future capital_allocation decisions? This is a major question for long-term investors.
• Competitive Threats: The FinTech landscape is intensely competitive. While the core banking moat is strong, an investor must be wary of “death by a thousand cuts” from smaller, more innovative rivals over the long term.
• The “Value Trap” Risk: There is always a risk that the business is cheap for a good reason. The core business could be stagnating more than it appears, and the spin-off may not be enough to reinvigorate growth.

• economic_moat
• margin_of_safety
• mr_market
• intrinsic_value
• special_situations
• sum_of_the_parts_valuation
• capital_allocation
• value_trap
• turnaround_investing