S1 Accepts ACI's Hostile Offer, Ending Merger Drama

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The closely followed merger dance among payment processing software companies S1, ACI and Fundtech came to a close today with S1's acceptance of the sweetened-yet-still-hostile takeover bid from rival ACI. Meanwhile, Fundtech, the other major party to this love triangle, declares it is happy with its new acquirer, private equity firm GTCR.

Under Monday's agreement, ACI will acquire Atlanta-based S1 for $9.55 per share. This was an increase of $0.42 per share in cash from ACI's previous offer and a slight premium over S1's market price, which shortly after the announcement was $9.24 per share.

To recap the history here, in late June, Jersey City-based Fundtech and S1 agreed to merge in a stock-for-stock transaction worth $700 million. S1's focus on consumer payments was considered a good fit with Fundtech's specialty in commercial payments. S1 had a larger presence in Latin America and Africa, while Fundtech had developed a strong presence in India and Western Europe.

In late July, New York-based payments processing software company ACI presented S1 with an unsolicited offer to buy the company for $540 million. In early August, S1's board rejected the offer, saying it was not in the best interests of the company and its shareholders.

Then, in a surprise twist, on September 15 Fundtech announced it was accepting a $400 million offer from private equity firm GTCR. The firm plans to combine Fundtech with an earlier acquisition, software provider BankServ. The combined company will be called Fundtech Inc. and be headquartered in Jersey City. The deal should be completed in the fourth quarter. "GTCR believes in our strategy," George Ravich, CMO of Fundtech said at the Sibos conference shortly after the announcement. "This lets us invest more in our technology." BankServ and Fundtech technology sets are complementary, he says; for instance, Fundtech offers cash management, which BankServ doesn't and BankServ has retail technology such as remote deposit capture that Fundtech lacks.

But this move left S1 vulnerable to ACI's advances, to which it succumbed today. Industry observers had mixed reactions.

"I think that this is probably a better deal for ACI customers than for S1 customers," says Aaron McPherson, practice director, financial services at IDC Financial Insights. "There is considerable overlap among the two companies' product sets, particularly in online banking and debit/ATM switching, and so it is likely that ACI will be folding S1's technology into its own products." And ACI's claim that it will achieve $30 million in cost savings from the merger suggests severe cuts ahead in staff and infrastructure, he observes.

On the other hand, the merger will give ACI greater scale and global reach, McPherson says. "My impression is that S1's technology, particularly in channels, is somewhat superior to ACI's, so ACI's products will benefit from having access to it. It's probably not a very happy day for S1 management; they obviously didn't want things to end up this way, but in the end they had no choice, given Fundtech's withdrawal and the lack of a white knight."

Christine Barry, research director at Aite Group, had a more positive attitude toward the just-announced ACI-S1 merger. "I think they offer complementary products," she says. "In the case of Fundtech and S1, the companies' environments were a better match, but I saw strengths of each potential acquisition."

ACI will benefit from the additional products S1 offers that it didn't already have, such as branch technology. S1 is strong in the community banking and credit union space and it has a strong front-end solution for cash management, she believes. "By the two joining forces, they'll have a stronger cash management offering," Barry says.

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