A Small Vendor Throws in the Towel

Peerless Group Inc.'s nine-year run as an independent banking software company is about to end.

Its primary competitor, Jack Henry & Associates Inc., announced an agreement last week to buy Peerless for $36 million of stock.

The deal would add 350 banks and credit unions to Jack Henry's base of 1,500 customers.

Peerless, which was run by former executives of Electronic Data Systems Corp., found it increasingly difficult to compete against the larger and better-funded Jack Henry.

Peerless earned just $1.9 million on 1997 revenue of $30 million, for an after-tax margin of just 6.3%. Jack Henry's margin was 19.4% on $113 million of revenue.

"I think it was inevitable that Peerless needed to match up with somebody," said Kevin Dyches, a Kansas City, Mo.-based analyst with Prudential Securities Inc.

The acquisition would gird Jack Henry to compete against bigger fish in bank computer services, such as Fiserv Inc. and M&I Data Services Inc. Jack Henry aspires to grow as a service bureau and will gain 20 outsourcing customers in the Peerless transaction.

Also, Jack Henry would make its first foray into the credit union market, via 100 of Peerless' customers.

"This has been our largest acquisition to date," said Michael Henry, chairman and chief executive officer of Monett, Mo.-based Jack Henry. "We know how well something like this could fit into our organization. The credit union business will be a nice opportunity for us to diversify a little."

"Peerless would not see the same revenues and margins that we see selling our own product," Mr. Henry said. "It makes a big difference."

He said Peerless was disadvantaged by poorer cash flows and a smaller pool of funds for product development. Whereas Peerless relied on other companies to deliver specialized services such as Internet banking, Jack Henry could afford to develop its own system and not have to share revenue.

Peerless was the community banking division of Electronic Data Systems until a management buyout in November 1989, which was backed by venture capitalists including Allied Capital Corp. of Washington.

The company went public Oct. 3, 1996, issuing 2.44 million shares at $8, which was as high as it ever got. The share price has been below $5 in recent months.

"I feel like I have been fighting a war for the last nine years," said Peerless chairman and chief executive officer Rodney L. Armstrong Jr., who owns 16% of the company. "We were getting pressure from stockholders.

"We could never get the stock to where it should be. Doing a deal with Jack Henry was the best alternative for us."

Mr. Armstrong, 54, said he will not move to Jack Henry.

"It's a brutal industry," said Art Gillis, president of Computer Based Solutions, a Dallas-based consulting firm. "Jack Henry is No. 1 in this business, so why go to No. 2?"

He noted the irony that when Jack Henry was struggling in 1990, Peerless tried to buy it

Peerless would become an independent unit in Dallas, led by Steven Tomson, its president and chief operating officer. The deal is expected to close in the fourth quarter. On the market last week, Peerless rose $1, to $6.125, while Jack Henry fell 37.5 cents, to $44.25.

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