When S1 Corp. closes on its acquisition of Q-Up Systems Inc., it will have fleshed out its Internet banking offerings to most bank sectors and strengthened its developments on the increasingly popular Windows NT server operating system. The deal may have closed by publication date, S1 sources indicated.

S1's decision to acquire the fast-growing Austin, TX, vendor, came amid a sense that Internet vendors to community banks will be snapped up. S1 agreed in March to buy Q-Up in a stock transaction valued at $286 million. That followed some late-1999 deals (Digital Insight Corp. and nFront Inc., Sybase Inc. and Home Financial Network) that many foresee as the start of merger mania among the 30-plus vendors of Internet banking solutions to community banks.

"The trend in the community bank space is consolidation," says a spokesperson for Atlanta-based S1. "S1 had its eye on this area for a while, but the combination of timing and the market dynamics made our entrance in this space ideal."

"With Q-Up, S1 will be the largest provider of NT technology in the banking industry," the spokesperson adds. Before approaching Q-Up, S1 had already added a Windows NT-based Web banking system to its own Unix-based one. S1, whose own system is offered in a service bureau arrangement, obtained a licensed NT system in its acquisition last year of Edify Corp., Santa Clara, CA.

However, Edify operated in almost the same marketplace as S1, while Q-Up brings S1 into the true community bank market, explains Q-Up CEO Robert (Hank) Seale. Its clients well meet the standard definition of a community bank as one with assets of less than $1 billion. S1 typically serves banks with more than $25 billion in assets, and Edify serves those with more than $10 billion, whereas Q-Up's average customer has about $285 million in assets, Seale says. He adds, "S1 is getting access to the community bank market, from de novo banks on up."

Q-Up also plans to introduce an e-commerce marketplace where its Internet banking clients merchant customers can sell to its retail customers, but details weren't being released at presstime.

S1 is gaining a company that more than tripled its customer base, to 350 institutions, within a year. Why would a company experiencing such growth sell out? Seale, who agrees that Q-Up's growth was atypical, says his company had been "contacted by virtually everybody in the (Internet banking) space" either wanting to buy Q-Up, be purchased by Q-Up or execute a merger of equals with Q-Up. "The ability to be part of the 800-pound Gorilla was a strong selling point," he says. "So we visited S1 and found there were many synergies between management and technologies."

One potential synergy would appear to be integrating Q-Up's and Edify's NT systems. (Many questioned S1's acquisition of Edify given that both firms were on incompatible systems.) However, S1's spokesperson says there's no such plan. Besides retail Web banking, Edify brought S1 call center software, plus applications for small business banking, and electronic bill presentment and payment. At the time that deal was announced, last May, Edify had about 130 clients for Web banking and a few 100 for call center software.

Both S1 and Q-Up maintain that Q-Up has much to gain by becoming part of the S1 empire. "We'll be getting access to VerticalOne (financial aggregation software recently acquired by S1), S1's wireless applications and S1's superior data center capabilities," Seale says. "There are other little pieces of technology," he adds, noting "we're still trying to identify everything that S1 has."

S1's spokesperson adds that Q-Up gains a parent with a powerful brand name-even though Q-Up is to keep its own name, which she says "has a lot of loyalty in its market. We're not naive enough to think we can drop the S1 solution in the community bank space," she explains.

Both S1 and Q-Up emphasize how important it was that management teams at the two firms get along well. Chris Musto, a principal with Gomez Advisors, Concord, MA, says, "It could be that the two management teams got along well, but Q-Up is an NT shop and S1 wanted more of their expertise."

Musto says the acquisition fills a gap in the S1 offering. "Despite its relationship with Fiserv, S1 really didn't have a community bank strategy." Data processing company Fiserv Inc. resells S1's Consumer Suite to banks ranging in size from $5 million to $20 billion.

Musto says S1 is wise to leave Q-Up as a separate operating entity with the same management team, pricing, sales force and applications as before. "S1 won't move Q-Up to its Unix platform because that would mean taking the NT people away from what they know," Musto says, reiterating the importance of NT to S1 in this acquisition. "To its credit, S1 recognizes it shouldn't try to switch all its products to one platform because that's the way to annoy customers." Musto adds, "Integration has to be job one for S1 because it acquired so many companies with different technologies.

Seale says Q-Up first looked at the merger from the perspective of its customers. "This deal gives us maximum potential to offer our community banks the same tools used by the most sophisticated banks," he says. Q-Up will migrate its data center to an S1 facility opened last September, but its customers will continue dealing with the same Q-Up people as before.

Paul Jamieson, another Gomez analyst, says, given the likelihood of better customer services through S1, the deal, is "neutral to positive" for Q-Up's customers.

Seale says joining S1 is a boon for Q-Up employees. The company was in the process of going public when it began talks with S1. Seale says the merger represents a short-term loss for Q-Up's founders because he assumes Q-Up would have been worth more (than S1 valued it at) had Q-Up gone public, and Q-Up's founders would have been its major shareholders. Seale says they "took a discount on the front end in exchange for the long term opportunity to be part of the leading Internet banking vendor in the world."

Gomez's Musto thinks S1 will stay its course of growth through acquisition. In fact, days after the Q-Up deal was made public, S1 announced it had a deal in the works with New York-based brokerage software company Davidge Data Systems Corp. If the purchase is approved, Davidge's technology would be used by S1 to enhance its consumer investments applications. However, Musto says Q-Up will be the only purchase S1 makes in the community banking space.

This alone should give Q-Up's competition something to worry about. "The vendors in (the small bank market) are going to have to ask themselves how they can compete on the resources, sales force and raw firepower that (an S1-owned Q-Up) brings to the field."

It's no wonder then that Q-Up's Seale waxes rhapsodic about becoming part of S1. "You often hear the term 'seller's remorse' after a deal like this," he reflects. "Not with us. We get more and more excited every day we work with S1."

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