Google Should Buy MasterCard

Sep. 10, 2014 10:29 AM ETAlphabet Inc. (GOOG), GOOGLAAPL, MA31 Comments
Wes Blevins profile picture
Wes Blevins
32 Followers

Summary

  • Google, Apple and others are either entering or looking to expand their footprints in the mobile payments market.
  • MasterCard's international reach, combined with Internet titan Google would create a global digital payments behemoth.
  • Based on trailing-twelve month numbers, an acquisition of MasterCard would immediately add $13.16 per share to Google's revenue.
  • An acquisition would put Google in an advantageous position to profit from Apple's partnership with MasterCard through its newly-announded ApplePay platform.

Three years ago, the world wasn't ready for Google Wallet's (NASDAQ:GOOG) (NASDAQ:GOOGL) launch. Massive data breaches among major retailers hadn't yet occurred, so consumers, banks and merchants saw little use in rushing to adopt "smart" cards and NFC-enabled payments and readers. With little consumer demand for the service, and few merchants with the capability to accept device-based payments, Google Wallet went nowhere. Understandably, Apple (AAPL) did not follow Google into mobile payments at the time.

Today's landscape is vastly different, with political and consumer pressure on banks and other financial institutions to adopt "smart" technology to protect consumer data. Various merchants such as CVS (CVS), Walgreen (WAG), Subway and McDonald's (MCD) have switched to card readers with NFC capabilities. And yesterday, Apple announced its Pay platform, which will allow iPhone 6 and iWatch users to make purchases at participating merchants by tapping or waving the device in front of an enabled reader.

Google Wallet essentially does the same thing on NFC-enabled Android devices, through its partnership with MasterCard's (MA) PayPass system. The consumer loads his or her credit card or bank account information to the app, then receives a virtual MasterCard account number. At that point, the device can be used at any merchant equipped to accept PayPass transactions.

Following Apple's unveiling of its Pay platform, Google stands at a disadvantage for a couple of reasons. First, Apple already has 800 million consumer cards on file through iTunes. Those users will not be burdened with entering account information again because it would be redundant for Apple to force them to do so. Second, although Google has a three-year head start on Apple in mobile payments, it does not have the advantage of a highly-anticipated media event that will be talked about and analyzed for days to come. Essentially, Google showed up to a 9:00 party at noon, before anything was set up. Google was a good sport and hung around to help set things up with everybody. Now it's 9:15 and Apple shows up in the limousine with all the pretty girls [Visa (V), MasterCard, American Express (AXP)]; and all Google can do is stand in the corner and watch.

Maybe not.

Staying with the party and pretty girl analogy for just a minute longer, Google has already been on a date with MasterCard and gotten a partnership with PayPass out of it. Google likes MasterCard and it makes sense to pursue the relationship further. And what would be more disruptive to the attention Apple is receiving at the party than for Google to walk up to MasterCard, get down on one knee and slide a $110 billion diamond ring on her finger?

A Google/MasterCard marriage would put Google in an advantageous position to profit from Apple's partnership with MasterCard through its Pay platform. Simply put, Google would receive a small percentage of every transaction made with a MasterCard account through Apple Pay. With around 27 percent of global market share, that's just over 200 million current potential MasterCard Apple Pay users that would be generating revenue for Google.

And that's just a small piece of the pie. MasterCard boasts just over 2 billion combined debit and credit cards worldwide, 8 percent higher than last year. Those 2 billion cards resulted in 10.6 billion processed transactions during 2014 Q2, a 12 percent increase from 2013. For the second quarter, MasterCard's gross revenue was $2.377 billion, up 13 percent YOY. Over the last 12 months, MasterCard's revenue was $8.9 billion. An acquisition of MasterCard would immediately increase Google's revenue by $13.16 per share, just over 20 percent.

As far as earnings, MasterCard reported $0.80 per share, a 14 percent increase from 2013 Q2. Over the last five years, MasterCard's earnings have increased by 23 percent annually, and analysts project 16.4 percent earnings over the next five years. Based on TTM earnings, an acquisition of MasterCard would increase Google's earnings by $4.58, a 24 percent jump.

MasterCard has plenty of room to grow. 85 percent of the world's consumer transactions are still cash-based. Google is helping to connect the world with high-speed Internet; and with MasterCard on board, it could help make payments safer and more efficient, as well.

Mergers and acquisitions happen all the time and analysts and talking heads constantly speculate on which company will be in the crosshairs next. It is rare that an acquisition is truly transformative insofar as how it affects the way business is done on a macro and micro level. Google undoubtedly wants to make a splash in the arena of mobile and digital payments. There are two companies, Visa and MasterCard, that would provide the biggest splash without encumbering Google with a lending bank. Visa is too big, and would require Google to invest in the largest acquisition in history. With a current market cap of $88 billion, MasterCard could probably be bought in the neighborhood of $110 to 120 billion. Google is sitting on $58 billion in cash, and could easily finance the difference with debt and/or stock.

It's unfortunate for Google that Apple is receiving all the attention right now for launching a service that Google has already been providing for three years. An acquisition of MasterCard would provide a definitive statement that Google is here to stay in digital and mobile payments. It would also provide an ever-growing boost in revenue and earnings for years to come, as the world gradually switches from paper to plastic, and from plastic to digital.

This article was written by

Wes Blevins profile picture
32 Followers
I first became interested in investing when I was about 12 years old. My mom was telling a story about her best friend's husband, who had bought stock in Clearly Canadian, and was handing out bottles to friends at every opportunity. I wanted to know more about what it meant to buy stocks, so my parents encouraged me to contact a broker, who suggested I get my start in mutual funds. In ninth grade, I participated in a stock market simulation game in one of my classes. My team came in first place, due in part to our tech-heavy focus in the mid 90s. Several years later, after following the market further, and contributing periodically to my mutual fund account, I inherited a good amount of money when a relative died. So, I opened an online account and started trading on my own around 2001-2002. Some of my initial purchases at that time included MO, AMZN and PFE. Unfortunately, I made some poor financial decisions during my college years and had to sell my positions to pay off some credit card debt. I currently manage the investments in my IRA, as well as those in my wife's. Since we are both relatively young, I look for stocks that offer consistent dividend growth, as well as companies that might be undervalued. I am currently long ETN, GOOGL, MA, GILD, TXRH and TWX.

Disclosure: The author is long GOOGL, MA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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