Release Date: 27 October 2015

The Western Union Company

Accounting Concerns and a Tax Black Hole

Ticker: WU.NYSE

Market Cap: US$10 billion

Recent Price: US$19.64

Target Price: US$13.75

Expected Return: -30%

Opinion: Strong Sell

You should have expected us

anon.analytics@neomailbox.ch Twitter: @anonanalytics www.anonanalytics.com

WU has only missed earnings estimates once since the beginning of 2012, and we find these consistent earnings beats questionable, especially from a mature company facing secular decline.

We have concerns over WU’s accounting as it relates to cost capitalization and believe Management is manipulating earnings to influence its share price.

WU’s unusually low tax rates, combined with the nature of a business model, viewed by many as predatory, raise concerns of public policy backlash.

1

Neither Anonymous Analytics nor its principles is a registered investment advisor or otherwise licensed in any jurisdiction, and the opinions expressed herein should not be construed as investment advice. This report expresses our opinions, which we have based upon publicly available facts and evidence collected and analyzed including our understanding of representations made by the managements of the companies we analyze, all of which we set out in our research reports to support our opinions, all of which we set out herein. We conducted basic research based on public information in a manner than any person could have done if they had been interested in doing so. You can publicly access any piece of evidence cited in this report. All facts, figures, and opinions are as at the last practicable date. This document has been prepared for informational purposes only. This document is not an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. We have made every effort to ensure that all information contained herein that support our opinions is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock or company covered herein or who may otherwise owe any fiduciary duty to the issuer. However, we do not represent that it is accurate or complete and should not be relied on as such, in particular, The Western Union Company (“WU” or “the Company”) and insiders, agents, and legal representatives of WU and other entities mentioned herein may be in possession of material non-public information that may be relevant to the matters discussed herein. Do not presume that any person or company mentioned herein has reviewed our report prior to its publication. As evident by the contents of our research and analysis, we expend considerable time and effort to ensure that our research analysis and written materials are complete and accurate, we strive for accuracy and completeness to support our opinions, and we have a good-faith belief in everything we write - but such information is presented “as is,” without warranty of any kind, whether express or implied. All expressions of opinion are subject to change without notice, and we make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such opinions and information or with regard to the results to be obtained from its use, and we makes no representation that we will update any information on this. You should assume that all statements contained herein are our opinion and are not statements of fact – even if certain statements can be perceived as such. That way, we don’t have to sacrifice our (hopefully) entertaining writing style by starting every sentence with “In our opinion” as advised by our team of neurotic and overpriced lawyers. We believe that the publication of our opinions and the underlying facts about the public companies we research is in the public interest, and that publication is justified due to the fact that public investors and the market are connected in a common interest in the true value and share price of the public companies we research. We are exercising our right to express such opinions in a public forum. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume that these types of statements, expectations, and projections may turn out to be incorrect. Anonymous Analytics itself holds no direct or indirect interest or position in any of the securities profiled in this report. However, you should assume that certain of Anonymous Analytics’ research and due diligence contacts, consultants, affiliates, and/or clients may have a short position in the stock or debt of WU and/or options of the stock, and therefore stand to gain substantially in the event that the price of the stock decreases. You should further assume that following the distribution of this report, the aforementioned individuals and entities may continue transacting in the securities covered therein, and may be long, short or neutral at any time hereafter regardless of this report’s initial opinions. Don’t be stupid and invest in the public markets unless you are prepared to do your own homework and due diligence.

Disclaimer

2

The fundamentals of Western Union (“the Company”, “WU”) are deteriorating and the Company has been losing agent exclusivity. Although Management has been resistant to any aggressive price cuts, we believe such cuts are imminent. The last time WU initiated large price cuts was in 2012, and following the announcement, the share price dropped 30%. We believe a repeat is likely. We also have concerns over WU’s accounting. WU has only missed earnings estimates once since the beginning of 2012 (14 quarters). We find these consistent earnings beats questionable. The earnings of such a mature company facing secular decline shouldn’t be that hard for Wall Street's finest to forecast. Based on the evidence and available information we have reviewed and analyzed, all of which we set out herein, we believe that WU is manipulating its EPS numbers through cost capitalizations in order to beat analyst estimates and directly influence its share price. Our analysis suggests that since the beginning of 2012, the Company’s largest quarterly share price declines have been followed by unusually large capitalization of contract costs. Because capitalized costs don’t flow through the income statement, we believe WU was able to report more favorable earnings results to the market, which in turn had the effect of either stemming the share price decline, or reversing it. WU’s reported tax rates have also been declining over the years and are some of the lowest among our analysis of multinationals. There is growing discontent over tax minimization strategies, which have become a hot topic for countries the world over. In Europe, numerous governments are strapped for cash while in much of the rest of the world countries that relied on the commodities boom are seeing large holes in their budgets. Companies like WU, which are already viewed by many as preying on the poor,1 do business in all these countries, yet appear to pay little, if any taxes. From a public policy perspective, we take issue with WU’s low tax rates, and believe they face severe headline risk. If anything, the case of Valeant is a sobering reminder of the problems that can quickly spawn when corporate practices are seen as exploitive and unfair.2

1 http://www.theguardian.com/global-development/2014/nov/29/money-transfer-companies-remittances-tessa-

jowell 2 http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html

Executive Summary

3

Western Union is a provider of money transfer services, operating through a network of approximately 500,000 agents globally. Where once WU’s yellow signs were synonymous with money transfers, the industry is now crowded with countless convenient alternatives, ranging from electronic options such as Paypal, Xoom, and numerous start-ups, to more traditional brick-and-mortar options, such as Moneygram (“MGI”) and Ria. Recently, even Wal-Mart jumped into the arena with its own money transfer service.3 While more traditional operators are making WU’s dominance in the legacy retail space a distant memory, the entire industry is being displaced by online and digital alternatives. WU’s near-monopoly in the global money transfer industry and its premium pricing is being eroded by these disrupters the same way the taxi industry is being dismantled by Uber.4 With an industry ripe with fresh competition, any portfolio manager that owned the stock over the last five years should have been fired, because the stock has gone nowhere while the market is up ~70%. Exhibit 1 WU vs S&P500

Source: Google Finance

3 http://www.forbes.com/sites/halahtouryalai/2014/04/17/walmarts-new-money-transfer-service-should-banks-

western-union-and-moneygram-be-nervous/ 4 http://www.google.ca/finance?q=NASDAQ%3ATAXI&ei=BkH8VcmLHojAsAGkk5foDQ

Introduction

4

There is perhaps no better indication of WU’s deteriorating fundamentals than its agent locations count. WU’s agent count peaked in Q2 2013 at 520,000 locations. In Q3 2013, the Company disclosed its agent count at 515,000. 5 The latter disclosure was notable because it marked the first agent decline in the Company’s history, and it was also the last time the Company would disclose this number. Today, the only disclosure WU provides concerning its agent count is a vague statement noting that the Company has “a combined network of over 500,000 agent locations…”6 For a company that once took pride in its vast network of agent locations, and paraded them as a clear advantage over competitors, Management’s recent lack of disclosure on the subject is telling. WU had envisioned having 1 million touch points as recently as 2012.7 But that seems like a distant memory now. In the meantime, competitors have been ramping up their own agent locations and choking WU of any effective monopoly it may have held in the past. For example, MGI has increased its agent locations by 50% from 233,000 to 353,000 since the beginning of 2011.8 Likewise, Ria has been on its own agent acquisition spree, increasing its location count by 150% from 107,700 to 272,000 in the same time period.9

Exhibit 2 WU, MGI, and Ria Agent Location Growth

Source: company filings, WU Q4 2013 to Q2 2015 numbers based on our estimates

5http://ir.westernunion.com/files/doc_news/Western%20Union%20Q3%20Earnings%20Release%20102913_v001

_v83b13.pdf pg. 8 6 http://ir.westernunion.com/files/doc_financials/Q2Y15/Q2-2015-Earnings-Release-FINAL-2.pdf pg. 6

7 Q1 2012 conference call

8 SEC Filings

9 SEC filings

0

100,000

200,000

300,000

400,000

500,000

600,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014 2015

WU MGI Ria

Aggressive Price Cuts Imminent

5

Along with agent locations, WU’s revenue also peaked, reaching US$5.6 billion in 2012. Since then, revenue has declined as growth rates have turned negative:

Exhibit 3 Year-over-Year Revenue Growth/Decline Rate

Source: Company filings, Capital IQ

Part of the issue is pricing. WU believes its brand carries a “trust factor” which allows it to charge premium prices.10 Globally, WU charges 15% to 20% more than its competitors.11 We believe Management’s notion of charging a 20% trust premium is antiquated. WU is no longer the only visible player in global remittance, and as more competitors become established and take mindshare, WU will be left with two options: keep its premium pricing and lose market share, or cut prices and lose on margins. Both scenarios are unenviable. For all the talk of premium pricing, this rhetoric was put to the test in 2012 as competition ate away at WU’s market share. In response, WU was forced to announce an “accelerating pricing investment” strategy12 – which is just a really obnoxious way of saying “aggressive price cuts”. Following the announcement, the share price responded with a 30% drop:

10

http://seekingalpha.com/article/2905026-western-unions-wu-ceo-hikmet-ersek-on-q4-2014-results-earnings-call-transcript?part=single 11

Ibid 12

http://seekingalpha.com/article/963351-the-western-union-management-discusses-q3-2012-results-earnings-call-transcript?part=single

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014 2015

6

Exhibit 4 Market Response to Price Cut Announcement

Source: Yahoo Finance

WU’s aggressive price cuts led to some short-term, albeit fleeting market share gains as C2C transaction activity rebounded sharply in 2013, and was followed by nominal revenue growth in 2014:

Exhibit 5 C2C Revenue and Transaction Growth (% change year-over-year)

Source: Company filings

Credit where its due, this play-out is consistent with Management commentary regarding price cuts at the time:

“I know it's about 12 to 18 months. It may -- in most of the time, within the 12 months, the revenues are coming back. And the first 2 months, you will immediately see the transaction increase market share's gain, and we have done that, and we will be active on the market to gain market share.”

-CEO Hikmet Ersek, Q3 2012 conference call

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014 2015

Revenue growth Transaction growth

7

However, any lasting benefits from the 2012 price cuts are elusive. While transactions did rebound immediately following the price cuts, those same growth rates have dropped dramatically in the last three quarters. Moreover, the revenue growth Management was hoping for seems muted. C2C revenue only grew for a portion of 2014 – barely – only to once again return to negative territory. When WU announced the aggressive price cuts back in 2012, revenue growth, transaction growth, and principal per transaction in the C2C segment (representing 80% of revenue)13 were deteriorating materially in the four quarters prior to the announcement: Exhibit 6 C2C Segment Drivers - Then

2011 2012

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Revenue 4.6% 7.6% 5.8% 2.6% 4.3% 0.0% -3.5%

Transactions 6.5% 6.1% 5.0% 5.1% 6.7% 3.9% -0.3%

Principal per transaction 0.8% 4.0% 3.1% -2.0% -3.9% -5.8% -6.6%

Source: Company filings

Today, the situation is worse. Revenue growth has already turned negative, transaction growth is more sluggish than last time, and principal per transaction is far deeper in negative territory: Exhibit 7 C2C Segment Drivers - Now

2014 2015

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Revenue 2.6% 2.1% 2.0% -1.8% -3.6% -2.7% ?

Transactions 8.7% 6.1% 4.6% 1.9% 2.5% 2.8% ?

Principal per transaction -0.9% 0.3% 0.0% -3.6% -6.8% -7.3% ?

Source: Company filings

Given the pattern, we believe WU will be forced to pursue a second round of “accelerating pricing investment” similar to 2012 when the stock dived 30%. On the Q2 conference call in July, CFO Rajesh Agrawal stated, “I don’t feel that for this year we’re going to do big pricing investments.”14 This statement implies big price cuts are on the table and only a matter of time, but given the sharp turn in the business, we don’t see how the Company can wait.

13

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000042/wu-6302015x10q.htm pg. 34 14

http://seekingalpha.com/article/3380215-the-western-unions-wu-ceo-hikmet-ersek-on-q2-2015-results-earnings-call-transcript?part=single

8

A common sound-bite is that WU is a great business because its agent locations give it a moat.15 …No it doesn’t, because this isn’t 1993. Generally, WU signs on agents at existing retail stores such as pharmacies and post offices. These locations do not require any additional investments to become WU agents, and any agency fees translate to ~100% incremental margins for the establishment. It was this promise of additional income at minimal investment that once allowed WU to recruit agents and rapidly expand its global footprint. However, this barrier-free model is now being used by competitors to recruit their own agents, often at the same locations as WU. Representatives from MGI and Ria can (and do) go to locations where WU has a presence and ask the location to also sign on as their agent. With little to no incremental costs and the option of additional income streams, the WU agents have little reason not to sign up with other money transfer operators as well. To maintain its moat and prevent this type of competitive incursion, WU has historically signed exclusivity agreements with its agents. However, more and more countries are deeming these agreements anti-competitive, and thus illegal. The first of these countries were Russia and Ukraine circa 2007, but the list has grown considerably in the last eight years. A few short years ago, almost all of WU’s agents were exclusive. Today, most of WU’s agents are non-exclusive, electing to become agents for multiple brands under the same roof, as evidenced by the changing language in WU’s disclosures over time: 2007 10-K: “… nearly all of the Western Union branded agents offer our services on an exclusive basis… Russia and Ukraine have each enacted laws that effectively prohibit… exclusive arrangements with banks in those countries.” 2009 10-K: “… most of our Western Union branded agents have offered our services on an exclusive basis… Recently, several countries in the Commonwealth of Independent States, Africa and South Asia have promulgated laws or regulations that effectively prohibit… exclusive arrangements with agents in those countries.” 2012 10-K: “… most of our Western Union branded agents offer our services on an exclusive basis… Recently, several countries in Eastern Europe, the Commonwealth of Independent States, Africa and South Asia, including India, have promulgated laws or regulations… which effectively prohibit… exclusive arrangements with agents in those countries. In addition to legal challenges, certain of our agents and their subagents have refused to enter into exclusive arrangements. 2014 10-K: “… many of our Western Union branded agents have agreed to offer only our money transfer services… Over the past several years, several countries in Eastern Europe, the Commonwealth of Independent States, Africa and South Asia, including India, have promulgated laws or regulations…

15

http://seekingalpha.com/article/3352295-theres-still-value-left-in-western-union

Moat? What Moat?

9

which effectively prohibit… exclusive arrangements with agents in those countries. In addition to legal challenges, certain of our agents and their subagents have refused to enter into exclusive arrangements. The inability to enter into exclusive arrangements or to maintain our exclusive rights in agent contracts in certain situations could adversely affect our business, financial condition or results of operations by, for example, allowing competitors to benefit from the goodwill associated with the Western Union brand at our agent locations. In 2012, WU lost its near 20-year exclusive relationship with Grupo Elektra in Mexico.16 Since then, WU’s business in Mexico – a key market – has suffered as the Company has cut commission rates to stay competitive. Between 2012 and the most recent quarter, WU slashed its total fees for the US-Mexico corridor by 26% for a US$200 principal transfer:

Exhibit 8 US-Mexico Commission, Cash-to-Cash (as a percent of US$200 principal)

Source: World Bank

WU’s price cut in the US-Mexico corridor is by no means unique. Remittance companies are often seen as predatory, charging the lower economic strata obscene fees to remit money to their families. These often unbanked individuals and migrant workers are the most in need of consumer protection measures. Accordingly, governments of all stripes – with input from a key World Bank program – have been aggressively focusing their regulatory efforts on ending egregious remittance fees and monopolistic business practices.17 As more countries pass legislation to ban the type of exclusivity agreements that WU had formerly enjoyed, WU’s dominant position in the market will continue to erode to the benefit of rivals and consumers.

16

http://www.reuters.com/article/2013/02/13/us-westernunion-results-idUSBRE91B1HA20130213 17

http://www.worldbank.org/en/results/2014/04/04/savings-of-44-billion

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Q1 Q3 Q1 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014 2015

Fixed fee FX fee

10

Not only have WU’s revenue figures declined after hitting a peak in 2012, margins have deteriorated as well. Exhibit 9 shows MGI’s and Ria’s footprint over time (as measured by WU/MGI and WU/Ria ratios), relative to WU’s C2C operating margins (C2C represented over 100% of WU’s operating profit in Q2):18

Exhibit 9 Agent Location Ratio vs C2C Operating Margins (Ratio left side, margin % right side)

Source: SEC filings

At the beginning of 2011, WU had nearly 2 agent locations for each MGI location, and enjoyed C2C operating margins of 28.6%. Today those figures stand at 1.4 and 23.3%, respectively, representing a decrease in margins of 530 basis points. Our regression analysis shows that there is a high correlation between MGI’s increasing footprint and WU’s decreasing C2C operating margins, with an R2 of 78%:

Exhibit 10 Correlation between MGI locations and WU’s Operating Margins

Source: Minitab, our analysis

18

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000042/wu-6302015x10q.htm

10%

15%

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25%

30%

35%

40%

45%

50%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014 2015

WU/MGI WU/Ria C2C Operating Margins

11

As the gap in agent count between WU and its competitors narrows, and as more agents refuse to sign exclusivity contracts, WU’s revenue and margins will both continue to decline. This decline is likely to persist indefinitely. While WU location count has already peaked, competitors continue to expand aggressively.

WU has a moat? Doubtful.

12

A conversation 10 years from now

Person A: Hey, remember back when you had to actually walk to the super market to send money to someone? Person B: No. Person A: Yeah, me neither.

Digital Competition WU’s core business is its retail-based cash-to-cash transfer operations, which caters extensively to the world’s unbanked population. WU clearly dominates the physical remittance space owing to its global network of agent locations. However, while competition from the likes of MGI and Ria have increased in this legacy space, the proportion of the world’s unbanked population has simultaneously shrunk. Between 2011 and 2014, the global percentage of adults with an account increased from 51% to 62%.19 Meanwhile, a sea of disruptive digital alternatives has emerged in the money remittance space offering convenience and record low transfer fees. WU has tried to stay relevant in the digital space by launching online transfer services through westernunion.com (“WU.com”). While WU.com showed strong growth in its early days given its small starting base, WU’s digital offerings have fallen far short of expectations. Initially, Management had targeted US$500 million revenue from digital by 2015. But that target became unrealistic and the date was pushed out to “beyond 2015”.20 For fiscal 2014, revenue from digital represented only 6% of total Company revenue, or US$336.4 million, up from US$277 million in 2013.21 WU’s failure to hit its mark on digital may have to do with the fact that consumers don’t necessarily think of WU as an online player. WU has historically been associated with a physical store-front with a yellow sign and bulletproof glass with a small slit to interact with agents. When people want to send money digitally, they look to options that specialize in online services. For example, Google Trends shows that searches for Xoom.com are nearly 4x as popular as searches for westernunion.com. Xoom is a prominent online money transfer service that currently operates in 39 countries, and offers cash pickup, direct deposits, and to-your-door money delivery:22

19

http://www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-in-number-of-unbanked-says-new-report 20

Q2 2014 conference call 21

Company filings 22

https://www.xoom.com/about

Digital Disruption

13

Exhibit 11 Xoom.com (red) vs Westernunion.com (blue)

Source: Google Trends

What Happens When Xoom Enters a Market? While the Company does not break out revenue beyond its US-US and US-Mexico corridors, US-India, US-Philippines, and US-China are also key markets, as evidenced by WU’s US website, where the US, China, India, Mexico, and the Philippines are first-choiced on the ‘Destination’ menu:

Exhibit 12

Source: https://www.westernunion.com/us/en/price-estimator/start.html

14

Xoom already has an established presence in Mexico, India, and the Philippines. As a response to competition, WU has lowered its online transfer fees in these corridors by between 20% to 44% since 2012, according to World Bank data. By contrast, fee transfers to China, where Xoom has been absent, have remained high. However, Xoom announced earlier this year that it is now entering China and we expect that WU will have no choice but to cut its prices in in the country to stay relevant.23

Exhibit 13 Total Fees for Online, Same-Day Transfers (as a % of US$200 principal)

Source: World Bank data

As Xoom expands its geographic presence, we expect WU will have no choice but to continue to cut its online prices. This July, Paypal offered to acquire Xoom for US$890 million.24 With the acquisition, Xoom will have funding and network access to accelerate its geographic expansion from 39 countries to all over the world.

23

http://www.sec.gov/Archives/edgar/data/1315657/000155837015000665/xoom-20150331x10q.htm pg. 17 24

http://www.wsj.com/articles/paypal-to-buy-money-transfer-company-xoom-1435786997

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Q1 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2012 2013 2014 2015

US-Mexico US-India US-Philippines US-China

15

Given all the competitive and structural challenges facing WU, it’s surprising that the Company’s share price has resisted gravity and managed to stay unchanged over the last five years. However, our analysis of the available evidence suggests that the Company may be manipulating its earnings in order to directly influence its share price. Going as far back as nine years to its 2006 spin-off as a public company, WU has only missed earnings estimates three times in 36 quarters, according to Capital IQ. More recently, WU has only missed earnings estimates once since the beginning of 2012 (14 quarters):

Exhibit 14 Quarterly Earnings Surprise

Source: Capital IQ

We find these consistent earnings beats questionable. The earnings of such a mature company in secular decline shouldn’t be this hard for Wall Street's finest to forecast. In contrast, WU has only managed to beat quarterly revenue estimates half the time since 2012:

Exhibit 15 Quarterly Revenue Surprise

Source: Capital IQ

-5%

0%

5%

10%

15%

20%

25%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2012 2013 2014 2015

-4%

-3%

-2%

-1%

0%

1%

2%

3%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2012 2013 2014 2015

Accounting Concerns

16

The probability distribution of revenue beats reflects what we would expect from numbers that were not a function of management influence. Revenue recognition under GAAP is far less susceptible to accounting games than earnings. On the other hand, we believe the consistent and unlikely earnings beats are either the result of analysts systematically low-balling their earnings estimates over the course of nearly a decade, or WU is engaged in earnings management to meet or beat EPS estimates in an attempt to prop up its share price.

Capitalizing Costs and Share Price Pops Our analysis shows that since the beginning of 2012, the largest quarterly share price declines have been followed by substantial capitalization of contract costs by WU. Since capitalized costs don’t flow through the income statement, we believe WU was able to report more favorable earnings results to the market, which in turn had the effect of either stemming the share price decline, or reversing it:

Exhibit 16 Share Price Movement and Cost Capitalization

Earnings Date

Price before Earnings

Price before Previous Earnings

Decline Since Last Q

Cost Capitalization

Reported EPS Beat (%)

Adjusted EPS Beat (%)

2012

Q1 24-Apr-2012 $17.95 $19.70 -8.9% 55.8 0% -7%

Q2 24-Jul-2012 $16.95 $17.95 -5.6% 22.5 7% 11%

Q3 30-Oct-2012 $17.93 $16.95 5.8% 38.8 2% 0%

Q4 12-Feb-2013 $14.34 $17.93 -20.0% 57.8 20% 8%

2013

Q1 30-Apr-2013 $14.81 $14.34 3.3% 11.8 12% 22%

Q2 30-Jul-2013 $16.98 $14.81 14.7% 30.3 6% 5%

Q3 29-Oct-2013 $19.24 $16.98 13.3% 26.8 8% 9%

Q4 11-Feb-2014 $15.88 $19.24 -17.5% 50.4 -3% -12%

2014

Q1 1-May-2014 $15.85 $15.88 -0.2% 16.6 6% 13%

Q2 31-Jul-2014 $17.47 $15.85 10.2% 27.8 0% 1%

Q3 30-Oct-2014 $16.70 $17.47 -4.4% 4.6 16% 27%

Q4 10-Feb-2015 $18.40 $16.70 10.2% 24.1 24% 28%

2015 Q1 30-Apr-2015 $20.28 $18.40 10.2% 17.2 3% 8%

Q2 30-Jul-2015 $19.02 $20.28 -6.2% 57.5 5% -2%

Average 31.6

Std Dev 17.1

Source: Company filings, our analysis. ‘Adjusted EPS Beat’ represent our calculations of how much WU would have beat/missed earnings if they had expensed capitalized costs in excess of the $31.6 million average.

17

Since 2012, WU has averaged US$31.6 million in the capitalization of contract costs per quarter, with a standard deviation of ±US$17.1 million. In effect, we would generally expect quarterly capitalization costs to fall below US$48.6 million most of the time. However, in Q1 2012, Q4 2012, Q4 2013, and most recently, Q2 2015, WU reported capitalized contract costs outside this upper range. The timing of these four deviations is suspect, because they came directly after the four worst quarterly share price performances since 2012. More recently, WU reported large capitalization of contract costs last quarter, beating earnings estimates. Our adjustments suggest that if WU had capitalized contract costs consistent with its historical average, it would have actually missed Q2 2015 EPS estimates by 2%, all else equal. This isn’t too much of a surprise given how sharply C2C fundamentals deteriorated in the most recent quarter.

18

With little explanation, WU’s tax rate has perpetually declined over the years:

Guidance of 25% tax rate for 2011,25

Guidance of 16% tax rate for 201226

Guidance of 15% for 201327 and 201428

Guidance of 13% for 2015.29 We are hard-pressed to find many companies with such low tax rates. By comparison, Euronet Worldwide (EEFT.NASDAQ), the owner of the Ria, reports annual tax rates of 25% or more.30 In the most recent quarter, WU reported a tax rate of 8.5% (11.8% normalized), which is already lower than the 13% tax rate it initially guided for 2015, and further helped the Company beat Q2 estimates. Unfortunately, WU provides little information to justify its tax rates. For example, on the Q4 2014 conference call, when an analyst asked how the Company managed a 6% tax rate in the quarter, the CFO responded: “I won’t get into the details of which specific items drove our tax rate down in the fourth quarter.”31 Perhaps one day WU will realize that it’s a publicly-traded company and disclosing how taxes affect shareholder earnings comes with the territory. Responding to its low tax rates more broadly, Management stated that they were the result of operating “in very low tax jurisdictions” and “ongoing tax planning.”32 The ‘ongoing tax planning’ statement doesn’t really say anything, but we find the ‘low tax jurisdiction’ justification questionable. Among the top ten remitter and receiver countries that we analyzed, the weighted average corporate tax rate was 29%. These countries represent nearly half of all global remittance activity:

25

Conference call Q4 2010 26

Conference call Q2 2011 27

http://seekingalpha.com/article/1176841-the-western-union-management-discusses-q4-2012-results-earnings-call-transcript?part=single 28

http://seekingalpha.com/article/2013091-the-western-union-management-discusses-q4-2013-results-earnings-call-transcript?part=single 29

http://seekingalpha.com/article/2905026-western-unions-wu-ceo-hikmet-ersek-on-q4-2014-results-earnings-call-transcript?part=single 30

SEC filings 31

http://seekingalpha.com/article/2905026-western-unions-wu-ceo-hikmet-ersek-on-q4-2014-results-earnings-call-transcript?part=single 32

http://seekingalpha.com/article/2905026-western-unions-wu-ceo-hikmet-ersek-on-q4-2014-results-earnings-call-transcript?part=single

Tax Black Hole

19

Exhibit 17 Corporate Tax Rates

Remitters Share of global

outflow Corporate Tax rate

Receivers Share of global

inflow Corporate Tax rate

US 9.2% 39.0% India 12.1% 34.6%

Russia 6.4% 20.0% China 11.0% 25.0%

Saudi Arabia 6.0% 20.0% Philippines 4.9% 30.0%

Switzerland 4.0% 17.9% Mexico 4.3% 30.0%

Germany 3.4% 29.7% France 4.3% 33.3%

UAE 3.1% 55.0% Nigeria 3.6% 30.0%

Kuwait 2.6% 15.0% Egypt 3.4% 25.0%

France 2.3% 33.3% Pakistan 2.9% 33.0%

Luxembourg 2.1% 29.2% Germany 2.7% 29.7%

Netherlands 2.0% 25.0% Bangladesh 2.6% 27.5%

41.1% 28.6% 51.8% 30.0%

Source: World Bank, http://www.tradingeconomics.com/india/corporate-tax-rate For WU’s 13-15% tax rates to balance, this would mean the jurisdictions that account for the other half of all global remittance activity have tax rates near zero. But according to an online tax list, very few jurisdictions have such low tax rates, and WU admits that no jurisdiction outside the US accounts for more than 6% of its revenue.33 The alternative would be to assume that WU is using some sort of tax loopholes such as inversions or transfer pricing. Often drug companies report tax rates comparable to WU. These tax rates are generally the result of inversion transactions where the drug company transfers intellectual property, such as patents, to low tax jurisdictions, and then charges the operating subsidiaries in high tax jurisdictions royalties on the IP. This shifts earnings to the low tax jurisdiction and reduces taxes. Alternatively, transfer pricing can be used where goods are transferred from high tax jurisdictions subs to subs in low tax jurisdictions and then sold in order to shift income. However, according to one tax expert, WU does not seem to have the underlying business model associated with these type of strategies. A read of the Company’s revenue recognition policy does not suggest the ability to manage revenue, and the primary costs incurred by WU are agent commissions which don’t lend themselves to selective allocation.

33

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000008/wu-12312014x10k.htm pg. 7

20

Without access to its books it’s impossible for us to know how WU can report such low tax rates, but it seems that even the Company itself is confused by its own tax strategies. From the most recent 10-K filing:

“As of December 31, 2014, no provision has been made for United States federal and state income taxes on certain of the Company's outside tax basis differences, which primarily relate to accumulated foreign earnings of approximately $5.6 billion... Such taxes could be significant. Determination of this amount of unrecognized United States deferred tax liability is not practicable because of the complexities associated with its hypothetical calculation.”34

That’s not very inspiring.

Tax Strategies and the Coming Backlash There is growing discontent over tax minimization strategies, which have become a hot topic for countries the world over. In Europe, numerous governments are strapped for cash while much of the rest of the world, countries that relied on the commodities boom are seeing large holes in their budgets. Companies like WU, which are already viewed by many as preying on the poor,35 do business in all these countries, yet appear to pay little, if any taxes. There is an argument that governments should look the other way if these companies create jobs. In a recently penned letter to the US Senate, Carl Icahn noted that repatriation of foreign profits to the US will help with job creation.36 Icahn was likely not referring to WU. WU operates in more than 200 countries, but has only 10,000 employees worldwide.37 By contrast, GM employs 15,000 workers in Mexico alone.38 WU’s business model is predicated on agents who run their own unrelated business irrespective of WU. To call WU a job creator is to stretch the definition. The low taxes WU pays on its large profits are an affront to governments everywhere. And all it will take is for one fed-up country to make some noise before every other country start looking at how much WU pays in taxes vs how much it benefits from operating in that country. If anything, the case of Valeant is a sobering reminder of the problems that can quickly spawn when corporate practices are seen as exploitive and unfair.39

34

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000008/wu-12312014x10k.htm pg. 121 35

http://www.theguardian.com/global-development/2014/nov/29/money-transfer-companies-remittances-tessa-jowell 36

http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/ 37

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000008/wu-12312014x10k.htm pg. 20 38

http://www.wsj.com/articles/gm-to-invest-5-billion-to-expand-facilities-in-mexico-1418323909 39

http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html

21

We see WU as a deteriorating business that becomes more obsolete with each passing year. Furthermore, we believe a combination of capitalized costs and unsustainably low tax rates helped WU beat estimates in the most recent quarter, and we are highly dubious of a company that almost never misses earnings estimates. From a public policy perspective, we take issue with WU’s low tax rates, and believe they face severe headline risk. Given the fundamentals of the business, we believe another price cut similar to 2012 is imminent. The last time WU announced aggressive price cuts, the shares responded by correcting down 30%. Accordingly, we believe another correction is in the offing. Therefore, we value WU at US$13.75, representing a decrease of 30% from the recent share price of US$19.64.

Opinion: Strong Sell

Conclusion