Fidavante-Merger Musings

Posted by Mark Brousseau

Vijay Balakrishnan, president of StratEx, LLC (770-598-5747) passes along the following blog entry with his musings on the recent merger between Fidelity National Information Services and Metavante. For more insights from Balakrishnan, visit his Web site at www.stratexllc.blogspot.com.

In an era characterized by synthesized monikers a la "Brangelina" for famous couples, "Fidavante" is perhaps warranted for the entity to be created by Fidelity National Information Services' acquisition of Metavante. The combination promises to be a powerhouse to rival Metavante's cross-town rival Fiserv. With over 2200 core banking customers and 220 million cards processed, Fidavante's potential operating leverage is nothing short of phenomenal. The road to fruition, however, is dependent on the successful integration of two complex organizations.

At the core. The greatest payoff, arguably, is in the rationalization and rejuvenation of the combined core banking base. As the oft repeated watchword argues, "Core is King!" It is also the most difficult integration challenge ahead. Both companies have large customer bases with legacy systems. The Fidelity repertoire includes customers on systems as disparate as Systematics, Horizon, Mercury and Miser. The Metavante stable includes the Integrated Banking Suite (IBS) platform, as well as the Bankway products that came by way of the Kirchman acquisition- the latter marketed through both outsourced and in-house license models. In addition, Metavante has entered into an agreement with Temenos to produce a next-generation core banking solution for large U.S. banks. The Fidelity equivalent is its Profile product.

There are myriad strategy alternatives. Does it make sense to focus the new technology from either Temenos or Profile on effecting a technology turn within the existing small-to-medium sized institution base? Notwithstanding the daunting number of conversions, it can be argued that this option is easier than the heart surgery of core replacement in a large bank. Or is it better to leave the legacy base as is for now, and use the next-generation platform to go after larger institutions? How does one pick a winner between Temenos and Profile, given the shots across the bow already being fired with the recent statement from Temenos that its agreement with Metavante is binding on post acquisition successor parties? If large banks are the target market, exactly how big is big?

Whale hunting perils. I suggest the foremost prerequisite for success is to get a clearly articulated strategy for each core banking market segment. It can be argued that both companies have a predominantly small-to-medium financial institution footprint. Thus, execution of a strategy for that segment, regardless of what that ends up being, is likely to come naturally to the combined entity. Scaling the heights of large institutions, on the other hand, is a different matter. Selling to, and serving large, whale-like institutions is an art by itself, considering the long selling cycles, significant customization, and the volatility that large deals bring to the P&L lines. That said, there are elements within both companies that have come by way of acquisition that have a large-institution history. The trick will be to identify those skill sets, and allow them to succeed within an operating mileu that has long been used to the relative predictability of smaller institutions.

Switch hitting. The payments side of the business offers major synergies. The NYCE network from Metavante and the debit switching operation from Fidelity's eFunds acquisition are natural fits. The synergies between these two entities stretch back in history to when eFunds was part of Deluxe Corporation. If memory serves me right, Deluxe Data Systems provided debit switching processing services for NYCE based on the flagship CONNEX product. NYCE later took the processing in-house, based on a licensed version of CONNEX. Even today, CONNEX is a leader when it comes to very high volume switches like NYCE, and the synergy analysis should be straightforward. Looking ahead, the gap that has endured the Deluxe-eFunds-Fidelity chapters, is for a product that could compete effectively with ACI's Base 24 at smaller networks for switching and peripheral functions like ATM driving... another acquisition down the road?

It's in the cards. Fidelity brings with it a strong card processing base aimed at predominantly issuance processing for credit unions. This business has preserved its dominance in the credit union space right from its inception as Telecredit, through its acquisition by Equifax, spin-off as Certegy, and subsequent purchase by Fidelity. This is a net plus, as there is nothing on the Metavante side that enjoys a leadership position in this segment.

Striking the right image. Both companies moved into image based check, remittance and document processing through acquisitions. Metavante has a comprehensive offering from its purchases of AFS, Vectorsgi, Endpoint Exchange,Vicor and Treev. Its strategy has been to grow the medium sized institution AFS business base, while taking its image work-flow expertise up market to large institutions, leveraging account relationships and IBM CPCS based product knowledge from Vectorsgi. The Fidelity offering is primarily based on its acquisition of Bankware. There will likely be a need to rationalize offerings between the erstwhile Bankware and AFS product lines.

There has always been a gap in the old AFS line at the very low end (institutions of less than $100 million in assets). There may be a case for looking at the Fidelity (Bankware) line as an alternative. I suspect, however, that both companies will look at addressing the low end through outsourced item processing services. The choice of the right platform will depend on multi-institution capability. Both Bankware and AFS originally built products for in-house licensed use. It is often the case with products initially built for in-house licensed use that functions like partitioned databases and multi-customer billing (as opposed to operating a different instance of the product to serve each customer), are part of later redesign efforts. Both companies have been at the multi-institution outsourcing business for a while, and it is entirely possible that both platforms lend themselves adequately to the needs today. Metavante's Vicor acquisition brings a high end wholesale remittance product line which doesn't have an equivalent on the Fidelity side. The Endpoint Exchange check image exchange network is unique with the many thousand routing and transit points served, although it is still challenged in its ability to offer a convincing alternative to the Federal Reserve.

Check it out. Fidelity has a check verification and guarantee business that includes the well known SCAN check verification system, courtesy eFunds. There could be interesting synergies between these check services, and Metavante's merchant capture products and services. Being able to assess payment risk at the point of check image capture can be a powerful combination, particularly if there are thoughts of launching "bank agnostic" merchant capture services. A broader approach to assessing debit risk- a debit bureau if you will- can also include Chex Systems from the erstwhile eFunds stable which is easily the most well established new account risk management system in the country.

Across the oceans. While the two companies together will operate in 27 countries and serve customers in 90, the international presence comes mostly from Fidelity. The expansion overseas has its roots in a strategy on the part of what was then Equifax Card Services to take its card processing expertise beyond U.S. shores. This has grown into a viable global presence. Fidelity's eFunds acquisition also brought with it a large presence in India, which provides a base of lower cost, high quality technology development expertise. This operation has its roots in the joint venture established between Deluxe Corporation and India's HCL Corporation in the mid-1990s to tap into India's growing technology base (eFunds was later spun off from Deluxe). Metavante's international presence is more modest, comprising mostly of distributor based product sales and recent agreements with Temenos and Monitise. The future augurs well for Fidavante's international expansion, as it is not beset with the same scale of integration challenge as the home base.

Cultural Exchange. In most mergers, getting different cultures to work together is more difficult than rationalizing products and technologies. At first glance, Fidelity and Metavante are similar in that they are both providers of banking and payment processing services to mostly mid-sized institutions. Processors tend to have a culture that is unique in that there is great emphasis on operational efficiency to keep pushing those "clicks" through. A closer examination yields a few differences. Metavante had its origins as the captive data processing center of the Marshall and Ilsley bank. Until the spin-off of a year or so ago, the company grew dramatically under the ownership of the large mid-western bank. The company prides itself on customer service, and was able to develop its culture in a relatively stable atmosphere. The Florida based Fidelity has grown through the acquisition and absorption of sizeable businesses with varied histories. As discussed previously, Fidelity is also more global in its footprint. While I don't see any "show-stoppers", it should be recognized that there will be varied perspectives at the table.

A third pole? Almost more interesting than the Fidavante saga is the potential shift in the competitive landscape. The combined entity presents a formidable challenge to Fiserv. With the exception of not being able to match Fiserv's dominance in the ACH arena with its PEP+ product, it is arguably set to becoming the second pole in this business. Does this signal a rush for scale on the part of others? Like nascent planetary systems, there is the need for a center of mass around which alternate poles develop. Will it be First Data, privatized now, and debit payment-centric in posture? Can an SAP or an Oracle morph from being horizontal players to slugging it out in this vertical market? Where does Intuit go, post the Digital Insight acquisition- was that just a toe in the water or a harbinger of a more purposeful move into banking and payments? Where does this leave the many niche players in the marketplace?

It is possible that nimbleness and innovation will serve niche players while the big players sort out the integration challenges. They will do well, however, to heed the adage that the grass gets trampled when elephants quarrel. To take on the dominant players on their terms- especially those who can leverage their core banking business base- is suicide. The niche players only have two choices: Become a bigger fish, or find a smaller pond.

Predicting course and speed in choppy waters is difficult at best. Nevertheless, the observations offered here, as well as insights from those with other perspectives, makes this a fascinating development to watch.

What do you think? Post you comment below.

A Message from Frank Martire

Posted by Mark Brousseau

The following is a copy of an e-mail that was sent to all Metavante employees on April 1, 2009:

An Important Announcement: A Message from Frank Martire

Today we are pleased to announce that the Boards of Directors of Fidelity National Information Services, Inc. (FIS) and Metavante Technologies, Inc. (Metavante) have approved a plan to combine our companies. This combination positions us to offer one of the industry’s most comprehensive ranges of core processing, payment and risk management services to financial institutions and other businesses worldwide.

Both companies are preeminent leaders in our industry. FIS is ranked the number one banking technology provider in the world by American Banker and the research firm Financial Insights in the annual FinTech 100 rankings.

Headquartered in Jacksonville, Florida, FIS maintains a strong global presence, serving more than 14,000 financial institutions in more than 90 countries. Metavante is based in Milwaukee, Wisconsin and brings a 45-year tradition of innovative solutions and client partnership, serving 8,000 financial services firms and businesses worldwide.

The name selected for the newly combined company is Fidelity National Information Services, Inc., with the corporate headquarters to be located in Jacksonville, Florida. Following the completion of the transaction, the company will be publicly traded on the New York Stock Exchange under the “FIS” ticker symbol.

Leadership Team
The following individuals have been named to the new FIS leadership team:

• William Foley, Chairman of the Board (Current FIS Chairman of the Board)
• Lee Kennedy, Executive Vice Chairman of the Board (Current FIS President and CEO)
• Frank Martire, President and Chief Executive Officer (Current Metavante Chairman and CEO)
• Gary Norcross, Chief Operating Officer (Current FIS COO)
• Michael Hayford, Chief Financial Officer (Current Metavante President and COO)
  

Announcements about other members of the senior management team will be forthcoming as the new organization begins to take shape.

Strategic Rationale and Benefits
You are probably wondering about the rationale behind the decision to combine FIS and Metavante.

Here are some of the key benefits:

Scale and Reach – The scale of the combined company creates efficiencies, which improve our long-term competitive position. We also gain the ability to leverage FIS’s global reach to sell Metavante products outside North America.

Product Breadth and Depth – Our combined product and service portfolio will enhance our growth prospects. The increase in core banking relationships expands our cross-selling opportunities, giving us complete coverage of the top 100 financial institutions. In addition, we become an industry leader in item processing, prepaid card solutions and credit card processing for community banks.

Financial Strength – The combined company has more than $5 billion in pro forma 2008 revenue and a high percentage of recurring revenue. Increased cash flow will allow us to fund growth opportunities and to further pay down our debt ― both very important in this challenging economy.

As both the banking and financial technology industries continue to consolidate, combining our two companies is the best way to position the new FIS for future growth and long-term success.

Your Role
Focus on our clients. Each and every decision we make is with our clients’ best interests in mind. It is very important that we continue to deliver excellent service throughout the integration period and beyond. Assure our customers that the superior service and support provided by each of our companies will continue and then follow through by delivering on our commitments.

Equip yourself with information to clearly communicate about the combined company and to explain the benefits. Share any client or employee concerns with your manager so an appropriate response can be identified. You may also e-mail employees.newFIS@Metavante.com with any questions you may have.

Direct any media inquiries to Marcia Danzeisen, SVP, Marketing and Corporate Communications for FIS at 904-854-5083 or Chip Swearngan, VP, Corporate Communications for Metavante at 414-357-3688.

Next Steps
The transaction is subject to approval by FIS and Metavante shareholders, receipt of regulatory approvals, and the satisfaction of customary closing conditions. While this planning process takes place, business line executives and sales representatives will meet with key clients to communicate the benefits of this combination and respond to any questions or concerns.

Concurrently, integration teams representing both companies will form to begin the planning process of creating an even stronger resulting organization. Until the transaction closes, please limit direct contact between employees of the two companies unless you are specifically requested to do so.

Thank You
In closing, we want to take this opportunity to thank you for your continued dedication and support. We have the best employees in the industry and we are excited about the new opportunities this important step in the evolution of our companies presents.

Lee Kennedy, President and CEO, Fidelity National Information Services, Inc.
Frank Martire, Metavante Technologies, Inc., Chairman and CEO

Healthcare M&A Still Thriving

Posted by Mark Brousseau

Despite a weakening economy, 2008 was a solid year for M&A in the pharma and healthcare information and technology industry, according to Berkery, Noyes & Co. The total volume of M&A transactions in the pharma and healthcare information and technology market for 2008 increased to 156 transactions, an increase of 16 percent over the previous year; however, the total value decreased to just below $9 billion, a decrease of 9 percent, the investment banking firm says.

The most active segment for 2008 by volume was Healthcare IT, with a total of 75 transactions, or 48 percent of the total volume. Healthcare IT has been the most active segment for the past several years and we do not expect this to change in the upcoming year.

Berkery, Noyes & Co. observed a decrease in financial acquisitions during the second half of 2008, even though overall activity in the market as a whole remained solid throughout the year.

The industry ended the year on a strong note - Q4 2008 was more active in terms of deal volume than it had been for the previous 5 years, the firm says.

A notable trend for 2008 is that while the aggregate value of the industry’s top 10 deals and the ratio of transaction value/volume decreased from previous years, Berkery, Noyes & Co. observed an increase in 2008 median enterprise value. This suggests an overall increase in buyer selectivity as well as increasing activity and interest in the middle market, the firm says.

Looking ahead, Berkery, Noyes & Co. expects to see continued deal activity in the pharma and healthcare information and technology markets. These markets are less impacted by the economic downturn and may benefit from increased interest in healthcare.

Mergers: Easy Way Out?

By Mark Brousseau

It wasn't that long ago that scores of payments solutions and services providers seemingly were in play, and private-equity firms and big companies were tripping over each other to buy them.

Now with the credit crunch and global recession forcing retrenchment everywhere, PricewaterhouseCoopers forecasts that 2009 will bring "mergers of necessity."

"Troubled companies will look to align with larger, stronger players in order to survive," says Robert Filek, a partner in the consulting firm's Transaction Services group.

Thomson Reuters says the value of announced transactions in the United States was $1.1 trillion for the first 11 months of 2008, down from $1.6 trillion for the same period in 2007.

What do you think? Post your comment below.