After earning a reputation as a corporate turnaround artist, Michael Capellas finally is getting a chance to run a company that's not in trouble. Private equity giant Kohlberg Kravis Roberts has tapped the former chief executive of MCI and Compaq Computer to captain First Data (FDC) when its purchase of the $7 billion financial-transaction processor takes effect later this year.
First Data has the potential of playing a major role in the next wave of electronic commerce as e-commerce goes mobile and spreads rapidly in emerging economies such as China and India. The company projects revenue growth of 8% to 10% this year, and enjoys operating profit margins of 25%. Says Capellas: "It's the healthiest business I'll have run."
But Capellas' job also carries plenty of risks. As one of the largest leveraged buyouts on record, KKR's $26 billion purchase of First Data will saddle the company with $22 billion in debt at a time of uncertainty in the economy.
Brought MCI Through Bankruptcy
Capellas will replace Henry Duques, a longtime executive at First Data who returned to the company two years ago to reorganize top management and boost the lagging stock price. Duques said at the time that he would stay on for just two years. First Data's stock price has been hovering just below KKR's $34-per-share offer since the deal was announced in April. Previously, it was trading in the mid-20s. The company provides transaction services for 2 million ATM locations, 5 million retailers, and 1,900 credit- and debit-card issuers.
Capellas' main claim to fame was bringing MCI through bankruptcy proceedings and selling it to Verizon Communications (VZ) for $8.5 billion. Earlier, he patched up a troubled Compaq Computer and sold it to Hewlett-Packard (HPQ) for $19 billion. Since 2006, he has been an adviser to the private equity firm Silver Lake Partners. Capellas was interim CEO at Serena Software, a maker of tools that help corporations manage software development projects, and a Silver Lake company. Glenn Hutchins, a Silver Lake partner, says there is no ill will as a result of Capellas' jumping over to KKR. He says Capellas "has added significant value to our portfolio companies."
KKR already laid out a strategic plan for First Data, so it will be Capellas' job to execute on it rather than dream up something new. He believes that based on the current business alone he'll be able to meet the debt interest payments, increase capital investments, and expand into new markets. The company expects to produce free cash flow of $1.2 billion to $1.25 billion this year. "My first reaction [to the big debt load] was to make me nervous, but you have to get under the numbers to see how it works."
Returning to His Roots
Capellas says he was attracted to this job by the opportunity to help create the "next generation of commerce." That includes expanding in emerging markets and upgrading the company's technology. He plans on working with tech suppliers such as HP, IBM (IBM), and Cisco Systems (CSCO) to build new data centers packed with the latest gear and software for handling transactions. First Data spends more than $1 billion a year on technology.He also wants to help turn networked mobile devices into a major force in e-commerce. "In some ways I'm going back to my former role when I was a chief information officer. Instead of trying to hawk it, I'm using it," says Capellas.