First Data Corp. Exits the Check and Money Order Business

Large Cap Watch List member First Data (FDC) has announced it will exit the official check and money order business:

First Data Corp. announced today that upon completion of the strategic review of its Official Check and Money Order operation (the “Business”) the company has decided to gradually exit this line of business. Most of the Business will be terminated over a period of two to three years. The Business wind-down is expected to free up between $250-$300 million in cash for alternative uses including acquisitions, share repurchases or other corporate purposes during 2007. This cash is currently used in the operation of the Business… The company’s full year earnings per share guidance from continuing operations of $1.20-$1.26 does not include the costs and impacts of the Business wind-down. The net costs associated with the re-positioning of the portfolio and the wind-down cannot be accurately estimated primarily due to unpredictable dynamics in the municipal bond markets. The company intends to provide an update on these costs in connection with reporting its quarterly results during 2007. The wind-down will have a minimal impact on the company’s tax rate in 2007.

We believe FDC should withdraw its previous guidance altogether rather than dance around the issue of what it includes and does not include. By saying the “guidance from continuing operations… does not include the costs and impact of the Business wind-down” they are implying it should be treated as a discontinued operation. However, Financial Statement Analysis: A Global Perspective states that neither U.S. Generally Accepted Accounting Principles nor International Accounting Standards allow a “gradual or evolutionary phasing out of a product line or class of service” to be treated as discontinued. Change such as this is simply something that happens to businesses over time.