First Data 2007 Annual Report Download - page 23

Growth in the Company's Commercial Services business is derived primarily from acquiring new merchant relationships, new and enhanced product and
service offerings, cross selling products and services into existing relationships, the shift of consumer spending to increased usage of electronic forms of
payment and the strength of the Company's alliance partnerships with banks and financial institutions and other third parties. A substantial portion of the
Company's business is conducted through "alliances" with banks and other institutions. The Company's alliance structures take on different forms, including
consolidated subsidiaries, equity method investments and revenue sharing arrangements. Under the alliance program, the Company and a bank or other
institution form a joint venture, either contractually or through a separate legal entity. Merchant contracts may be contributed to the venture by the Company
and/or the bank or institution. The banks and other institutions generally provide card association sponsorship, clearing and settlement services. These
institutions typically act as a merchant referral source when the institution has an existing banking or other relationship. The Company provides transaction
processing and related functions. Both alliance partners may provide management, sales, marketing, and other administrative services. The alliance structure
allows the Company to be the processor for multiple financial institutions, any one of which may be selected by the merchant as their bank partner. The
Company relies on the continuing growth of its merchant relationships, alliances and other distribution channels. There can be no guarantee that this growth
will continue. The loss of merchant relationships or alliance and financial institution partners could negatively impact the Company's business and result in a
reduction of the Company's revenue and profit. The Company's largest merchant alliance, Chase Paymentech, is 51% owned by J.P. Morgan Chase Bank,
N.A., and 49% owned by FDC. The current term of the existing alliance agreement expires in 2010; however, JPMorgan had the right to terminate the alliance
due to the change of control upon the closing of the Merger. The Company has extended the time period to exercise this right to allow for further discussions
regarding the alliance. If JPMorgan exercises its termination right, FDC has the right to receive 49% of the alliance's merchant contracts by value and be
allocated 49% of the alliance's sales force. A termination is not expected to have a material impact to income from continuing operations or consolidated
EBITDA and the Company's reported revenues would increase. Potential risks if the alliance is terminated include the potential loss of certain processing
volume over time, the loss of JPMorgan branch referrals, the loss of access to the JPMorgan brand, and post-termination competition by Chase.
Acquisitions and integrating such acquisitions create certain risks and may affect the Company's operating results.
The Company has been an active business acquirer both in the United States and internationally, and may continue to be active in the future. The acquisition
and integration of businesses involves a number of risks. The core risks are in the areas of valuation (negotiating a fair price for the business based on
inherently limited diligence) and integration (managing the complex process of integrating the acquired company's people, products, technology and other
assets so as to realize the projected value of the acquired company and the synergies projected to be realized in connection with the acquisition). In addition,
international acquisitions often involve additional or increased risks including, for example:
• managing geographically separated organizations, systems and facilities;
• integrating personnel with diverse business backgrounds and organizational cultures;
• complying with foreign regulatory requirements;
• fluctuations in currency exchange rates;
• enforcement of intellectual property rights in some foreign countries;
• difficulty entering new foreign markets due to, among other things, customer acceptance and business knowledge of these new markets; and
• general economic and political conditions.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the Company's combined
businesses and the possible loss of key personnel. The diversion of management's attention and any delays or difficulties encountered in connection with
acquisitions and the integration of the two companies' operations could have an adverse effect on the Company's business, results of operations, financial
condition or prospects.
Unfavorable resolution of tax contingencies could adversely affect the Company's tax expense.
The Company has established contingency reserves for material tax exposures relating to deductions, transactions and other matters involving some
uncertainty as to the proper tax treatment of the item. These reserves reflect what the Company believes to be reasonable assumptions as to the likely final
resolution of each issue if raised by a taxing authority. While the Company believes that the reserves are adequate to cover reasonably expected tax risks,
there can be no assurance that, in all instances, an issue raised by a tax authority will be finally resolved at a financial cost not in excess of any related reserve.
An unfavorable resolution, therefore, could negatively impact the Company's results of operations.
Changes in laws, regulations and enforcement activities may adversely affect the products, services and markets in which the Company operates.
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