May 18, 2004

Providing dramatic evidence that the market for banking technology mergers is alive and flourishing, Milwaukee-based Metavante Corp. announced yesterday that it will acquire PIN-debit payments processor NYCE Corp. (Montvale, N.J.) from First Data Corp. (Denver) for $610 million in cash. The deal caps a month of buying activity on the part of Metavante, which also has announced plans to acquire core systems vendor Kirchman (Orlando) and check systems/imaging provider Advanced Financial Solutions (AFS, Oklahoma City).

It's all about providing a single source of expertise to banking clients, Frank Martire, Metavante's president and CEO, said in a teleconference on Monday. "There are natural synergies between our organizations," Martire said, adding that both entities hold "a financial institution-centric operating philosophy. We are firmly committed to ensuring that financial institutions remain at the center of the process. With the NYCE acquisition, we can offer a complete single source payment solution, which is increasingly requested by our customers." Together, Metavante and NYCE say they expect to serve 23 million ATM and debit cardholders, as well as process more than 235 million monthly EFT transactions and drive more than 20,000 ATMs.

Similarly, the Kirchman deal "was a strategic acquisition to fill missing [offerings] in core processing software," Martire reported, while the AFS purchase "moves Metavante from being a participant to a leader in Check 21." Furthermore, by bringing together these three technology organizations under the Metavante umbrella, the solutions provider expects to enhance cross-selling opportunities to both existing and new banking customers.

Another anticipated benefit of the three acquisitions is that they will enable Metavante to make a stronger financial contribution to parent company Marshall & Ilsley Corp. According to Mark Furlong, M&I's executive vice president and CFO, "Each has [the potential] to make a positive impact to 2005 earnings. The three companies fit in our strategy to build out Metavante's contribution to M&I." In terms of profit potential, the NYCE deal looks like a winner, according to Gwenn Bezard, a New York-based senior analyst with Celent. Given that NYCE's 2003 net profit margin of 21 percent was nearly three times as great as Metavante's, "they are buying profitability," he says.

The three acquisitions should help Metavante reinforce its relationships with its approximately 1,600 U.S. banking customers, primarily community banks, notes Bezard. "Small banks particularly like to rely on a single vendor," he says. "It makes sense for Metavante to provide [these services] to community banks," especially since competitors such as Fidelity National and Fiserv are pursuing similar growth strategies. "All the core processors are trying to snatch different pieces, to provide solutions to community banks. I'm not surprised that Metavante is getting more aggressive -- if you want to keep competing, you have to grow, and organic growth is not enough."

But there are some risks to the NYCE deal, Bezard points out. First of all, the $610 million cash price tag (of which First Data will receive approximately $389 million, the difference to be split among the four large banks that own the remaining third of NYCE -- J.P. Morgan Chase, Citigroup, HSBC, and the former FleetBoston) "is a lot of money -- almost as much as Metavante's total revenues in 2003 ($729 million)."

A related concern has to do with the status of NYCE's four large bank partners and whether they will continue to support the network or possibly take their business elsewhere. At the teleconference, Martire declined to comment on this issue. "If there is one big question about the deal, it's that," according to Bezard. "Basically the value of NYCE has to do with how the big banks/issuers that participate are going to react."

ABOUT THE AUTHOR
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & ...