Wedding bells are ringing again for technology vendors, but many bank executives in the midst of buying decisions may wait to uncork the champagne.
In the long term, the union of competing vendors should allow many banks to cut costs by helping them negotiate better prices and eliminate resources needed to manage multiple relationships.
But for now, financial institutions may hold off on product upgrades and more ambitious "rip-and-replace" projects for fear of a vendor phasing out their chosen platforms post-merger, analysts say.
"These are pretty big decisions for banks," says Gil Luria, a senior vice president who follows payments technology vendors for Wedbush Securities in Los Angeles. "They are pretty complicated products. You'd rather wait a few months for that to settle than … make a decision that you would have to change later on."
Such is likely to be a concern for clients of S1 Corp., a Norcross, Ga., company that sells cash management, payments processing, online banking and other software to banks.
Competitor ACI Worldwide Inc. on Tuesday announced a bid to buy S1 for $9.50 a share, or $540 million, potentially derailing S1's plans to merge its operations with the vendor Fundtech Ltd.
ACI executives on Tuesday said that combining with S1 would allow the companies to expand their global presence and generate as much as $100 million in new revenue from hosted technology services.
"With S1, ACI would be a larger, more diversified company that is strongly positioned across a wide range of sectors and supported by a broad base of revenues and earnings," Philip Heasley, the president and chief executive of ACI, said in a conference call with analysts on Tuesday. He added that the deal could close in the fourth quarter.
S1 did not return messages on Tuesday. Fundtech said in a statement that its merger agreement with S1 remains in effect but it did not plan to comment further on ACI's proposed offer.
Vendor consolidation can be a major boon to banks, which are looking to reduce the amount of resources they devote to dealing with multiple providers. Technology companies often provide discounts to clients that use more of their products. There can potentially be technical benefits, too, as vendors often try to integrate new software they acquire with existing platforms, making it easier for disparate systems to work together.
"In one way, for banks, it's a winning situation," says Christine Barry, a research director with Aite Group in Boston. "For them it's vendors that already have strong capabilities that are joining forces and broadening their product portfolio."
The competing S1 deals are the latest in a flurry of recent vendor M&A activity that began in the pre-financial crisis days, when many large vendors gobbled up competitors to cross-sell more products to banks.
Fidelity National Information Services, a Jacksonville, Fla., provider of core systems, online banking, payment processing and other software, said last month that it may bid on the U.K. core vendor Misys. Fiserv, a Brookfield, Wis., core vendor, last month said it is buying the smaller payments software company CashEdge of New York for $465 million. NCR, a Duluth, Ga., ATM provider, said this month it is buying Radiant Systems in Alpharetta, Ga., for $1.2 billion.
"I think we are picking up where we left off in 2007," Luria says. "I think now everybody's markets have stabilized. Banks have stabilized. Their purchasing has stabilized. I think the vendors are in a position where their stock is back up, they can look at combining in order to get scale. The vendors want to get scale and then their bank customers want to deal with less vendors so those two things are converging."
Bank of North Carolina, the $2.2 billion-asset subsidiary of BNC Bancorp in High Point, N.C., has consolidated virtually all of its relationships with the vendor Jack Henry & Associates, which in the past has acquired competitors to build out its product lineup.
That has helped manage technology issues in general, says Michael Bryan, a senior vice president and chief information officer at Bank of North Carolina.
"You don't have as much finger pointing between vendors when you have a problem or an issue," Bryan said, adding that it has needed less IT staff as a result of its buying decisions. "We're an outsourced Jack Henry shop and use all their peripheral systems so we have one call to the help desk when we have an issue."
Consolidation also helps vendors deal with the impending rise in bank mergers, which could potentially shrink the technology providers' client bases.
"I'm sure that's an influencer in their decisions as well," Barry said. "Many of the vendors are losing customers as a result of mergers and acquisitions. They're losing revenue. So by joining forces they can be stronger financially."
For ACI, buying S1 would help it expand geographically and gain new customers. ACI provides payments processing software to larger financial institutions and retailers as well as cash management and corporate online banking platforms for banks.
ACI on Tuesday reported its revenue in the quarter ending June 30 rose 23.4%, to $113.4 million. It reported net income of $9.8 million, or 29 cents per diluted share, compared with a net loss of $150,000, or zero cents per diluted share, a year earlier.
ACI has more than 800 customers and operates in about 90 countries. S1, which reports earnings on Monday, has more than 3,000 customers and operates in 50 countries.
ACI would potentially gain a consumer online banking platform, branch banking and additional cash management platforms by buying S1, Luria said.
"They'd get bigger in the cash management [space], they'd have a new lower-end offering payments software and then they'd expand their portfolio with however many of those products that they'd deem relevant," Luria said. Heasley said on the conference call that S1 also does business in the community banking sector, which is something ACI would have to "assess" to determine whether it is a good fit with existing business. That segment generates about $50 million to $60 million of S1's revenue, Heasley said.
S1's shares surged as much as 32.3% to $9.43 on Tuesday while ACI's shares rose as much as 5.4% to $37.63. Fundtech's shares fell as much as 7.6% to $17.70.
