Should Marshall & Ilsley Corp. spin off Metavante Corp.?
That question is being asked anew in light of the Milwaukee banking company's second-quarter results.
Metavante, the technology subsidiary, generated revenue of $288.2 million - 36.8% of M&I's revenue of $783.9 million - and banking contributed $413.3 million, or 52.7%. In 2003 the banking operations generated 60.4% of M&I's revenue of $2.4 billion, while Metavante brought in 29.7%.
Metavante is growing faster than M&I's banking operations and one analyst suggested that spinning the unit off would better serve the banking company and its shareholders.
The issue has come up before, especially in 2000. That year M&I tried to cash in on the technology boom by announcing plans for a public offering of Metavante shares. It withdrew the plan because of the dot-com crash, and since then has consistently called Metavante a core component.
Wall Street, however, has not forgotten, and analysts use many of the arguments for a spinoff that they used before. For instance, they can point to the fact that Metavante has three acquisitions set to close this quarter as evidence that the unit's expansion will continue.
Richard X. Bove of Punk Ziegel & Co. noted that M&I's deposit growth in the quarter was just 0.9%, which has not kept pace with its loan growth and has driven the banking company to borrow from the wholesale markets.
M&I's "opportunities are exceeding its ability to fund them in a low-cost manner," Mr. Bove said. "The company needs to be raising capital," and floating Metavante on the public markets would do exactly that.
Dennis J. Kuester, the chairman and chief executive officer of M&I, said in a prepared statement Friday that "Metavante is an integral part" of the products and services that M&I offers to banks.
He also said that "the factors for considering an IPO of Metavante in 2000, during the technology 'bubble' are less significant factors in today's marketplace."
M&I, which announced its second-quarter results July 12, said Metavante contributed 15.9% of its $193.1 million of operating income, against 12.8% a year earlier.
John Presley, M&I's chief financial officer, said during the earning conference call that because of seasonal factors Metavante's results were down slightly, but they were still higher than he had expected. He said that Metavante's full-year revenue would come in at the high end of the $1.1 billion to $1.2 billion that the company estimated in January, and he said net income would be $115 million to $120 million.
Frank R. Martire, Metavante's president and chief executive, said full-year results will be even higher, because the January projections did not include the three deals that are to close in the third quarter (they were announced in the second quarter).
Metavante is paying $65 million for GHR Systems Inc. of Wayne, Pa., which would take Metavante into the loan origination systems market; $19.5 million for the document imaging vendor Treev LLC of Herndon, Va.; and $145 million for Med-i-Bank Inc., which processes payments for health savings accounts.
Mr. Bove said all three purchases are to be financed primarily with M&I stock, which will hurt the banking company's balance sheet. In addition, Metavante has racked up debts from a long string of acquisitions; its seven last year included NYCE Corp., for which it spent $610 million.
Mr. Bove said a spinoff would benefit both M&I and Metavante. For the parent company, a whole sale or even a partial one would generate income, and any stock that M&I retained would be an asset that it could value at market rates.
M&I could raise capital by offering its own stock in the market, but Mr. Bove said a spinoff would make more sense because it would add to M&I's coffers and move Metavante debt off M&I's balance sheet.
At the same time, Metavante would get its own stock, which it could use to make more acquisitions. And Metavante stock would probably have a higher price-to-earnings multiple than M&I's current 16.4. "I think both sides would win," he said.
Mr. Bove downgraded M&I's shares to "market perform" from "buy" in May.
Heather W. Wolf, an analyst at Merrill Lynch, said that M&I's management has said in the past that it would consider a spinoff, if the bank could no longer fund Metavante's growth. "We would not be surprised" if M&I decided in the future to spin off the unit as a way to strengthen its balance sheet, she said. "They are getting to a point where it is getting more cumbersome for the bank to fund Metavante's acquisitions. They are certainly somewhat capital constrained."
Anthony R. Davis of Ryan Beck & Co. said that neither M&I nor Metavante needs a spinoff, and that it would run counter to M&I's corporate culture and publicly stated goals.
Mr. Davis noted that Mr. Kuester came up through the ranks of the data services organization. Mr. Kuester sees technology as "integral to what they do, to provide one-stop shopping to America's community banks," Mr. Davis said.
The 2000 spinoff plan was driven more by Wall Street than by the banking company, Mr. Davis said. "In that rarefied environment, they couldn't afford not to consider it."
He further noted that M&I raised $1 billion a year ago; it used debt and equity to pay for some of Metavante's larger acquisitions, including NYCE, the imaging-software maker Advanced Financial Solutions Inc., and the core processing software vendor Kirchman Corp.
However, Mr. Davis said Metavante tends to buy smaller companies, to fill a gap in its product portfolio or enter a new market.
"Given the size and the pace at which Frank Martire is doing deals, I don't think they are feeling any constraints," he said. "Their expansion goals are not sufficiently ambitious for them to need to go outside the bank."
