Fiserv Inc., a Milwaukee-based data processing company, has agreed to buy two outsourcing units from Mellon Bank Corp. for $70 million in cash.
The transaction, announced Monday, stems from Mellon's decision earlier this year to exit the bank outsourcing business, under which it provides data processing services to other banks. The Pittsburgh-based company concluded that the outsourcing business was peripheral to its strategy and had limited future growth.
For Fiserv, one of the nation's largest outsourcers, the deal provided an opportunity to boost its core business.
|A Good Deal'
The units it acquired provide basic banking services, such as savings and checking account processing, plus mortgage services. Mellon's trust outsourcing unit, which was also put up for sale in March, was not included in the deal and remains on the block.
"Overall, Fiserv got a good deal," said Lawrence A. Willis, consultant with First Manhattan Consulting Group.
The price tag was equal to the two units' annual revenues of $70 million, whereas similar processing businesses are typically sold for up to 1.5 times revenue, Mr. Willis said.
Fiserv's stock was up $1 to $21 in afternoon trading in the over-the-counter market.
But by completing the sale, Mellon achieved its overall goal, leaving the business at a reasonable price. "This was a sensible strategic move for Mellon," said Dennis Shea., a banking analyst with Morgan Stanley. "Growth [in Mellon's business] had slowed significantly, and it wasn't likely to pick up."
Mellon said the deal will give it an after-tax gain of about $15 million, and said it expects to complete the transaction by the fourth quarter. Mellon's shares were down 1/8 to $55.75 in afternoon trading on the New York Stock Exchange.
The unit that provides basic banking services, commonly called Data Center, contributes about $60 million annual revenue, Mellon said.
The mortgage unit, called Data Link, generates about $10 million in annual revenue.
Expanding Customer Base
With the systems come more than 200 bank customers, about 40 of which have more than $1.5 billion in assets.
The deal will expand Fiserv's customer base to include larger banks than the vendor typically serves.
Fiserv has grown rapidly over the past decade, acquiring about 40 companies. Two of its largest recent deals involved a Citicorp data processing unit and Basis Information Technologies Inc., an Atlanta-based outsourcing company.
"Fiserv is the one with the best track record" in acquiring other outsourcing operations, said Arthur Gillis, president of Computer Based Solutions Inc., New Orleans.
With the Mellon units, Fiserv said it will follow custom and leave the management and systems largely intact.
As part of the agreement, Fiserv will hire all 710 employees of the two business units, which operate in Pittsburgh, South Bend, Ind., and other locations.
Fiserv will also take over Mellon's Philadelphia data center, which employs about 85 people. Fiserv said it intends to retain most if not all of those employees as well. Fiserv said it plans to keep the data center in Philadelphia.
The deal ends months of speculation over which outsourcing vendor would ultimately acquire the units.
Customer Defections
During that time, at least two banking customers left Mellon for Milwaukee-based M&I Data Services Inc., an M&I official confirmed. Fiserv will need to act quickly to stave off further customer defections.
"We'll meet with customers before the month is out, and tell them: We're not here to convert you, and we're not here to raise your prices," said George D. Dalton, chairman and chief executive officer of Fiserv.
Mellon put the units up for sale publicly after talks with M&I floundered early this year, according to banking sources.
Subsequently, both EDS Corp., a unit of General Motors; and Systematics Information Services Inc., a unit of Alltel Co., were said to have discussed buying the units with Mellon.
