The deal by a pair of private-equity companies to acquire Open Solutions Inc. could be a harbinger of merger and acquisition activity in the sector, according to executives and observers.
The Glastonbury, Conn., core processing software vendor said Monday that it had agreed to sell itself to The Carlyle Group and Providence Equity Partners Inc. for $1.3 billion.
Louis Hernandez Jr., Open Solutions' chairman and chief executive, said in an interview that other private equity firms have been pursuing his company, but Carlyle and Providence "started pursuing us more aggressively."
He said he finally agreed to the Carlyle/Providence offer because it came with few strings and a price of $38 a share, or a 32% premium over the stock's average price in the past month.
The deal is expected to close next quarter.
Mr. Hernandez said he plans to use the cash infusion to expand abroad and to purchase other payments and antifraud businesses.
"We're talking very actively about acquiring other companies under our umbrella," he said, though he would not elaborate.
Bud Watts, a managing director with Carlyle and the head of its technology buyout group, said that as Open Solutions' new owner, his company would be involved in those deals.
The stability of Open Solutions is one of the things that made it an attractive buyout target, he said. "The notion that you take a company private to fix it is a caricature. The private-equity market has moved well beyond that sort of simplistic deal."
John Kraft, an analyst with D.A. Davidson & Co. of Great Falls, Mont., said in an interview that banking technology is typically a scale game, and that Carlyle and Providence may be looking for other companies to expand their portfolio. "I doubt they're done making acquisitions."
Open Solutions does not look like the typical candidate for a private-equity buyout, he said. "Open was not a distressed or takeout kind of candidate," but the sheer size of the offer would have been hard to ignore. "It's a hefty premium, so maybe they just couldn't pass."
Some of Open Solutions' competitors, including Jack Henry & Associates Inc., may have received similar offers, Mr. Kraft said, and Jack Henry's stock has already reacted to that possibility.
On Monday, shares in Jack Henry rose 1.25% from Friday's close, to $22.61. Mr. Kraft said the gain was a sign that the market is seeing banking technology vendors as a new potential buyout field.
Open Solutions offers core processing services, mainly to small banks and credit unions. Jack Henry, of Monett, Mo., offers a variety of banking technology, including core processing, also to small banks and credit unions.
Jack F. Prim, Jack Henry's CEO, would not say Monday whether it has received any similar offers.
"Private-equity firms have been very active in and around our space for some time now," but he sees no need to take his company private, he said.
Open Solutions' stock surged 24.04% Monday, to $37.56.
Many private-equity buyouts lead to sweeping management changes, but Mr. Hernandez said that there is little to fix at Open Solutions, and that the deal requires his management team to stay on board.
Coming into the deal, Open Solutions' financial position was solid, particularly after its March acquisition of Bisys Group Inc.'s information services unit for $470 million.
In the second quarter Open Solutions' net income rose 7% from a year earlier, to $4.1 million, and its revenue rose 127%, to $107.1 million. In the first quarter, its earnings rose 50%, mainly as a result of the Bisys acquisition.
M. Arthur Gillis, the president of the Dallas research and consulting firm Computer Based Solutions Inc., said that he was not surprised Open Solutions is being bought, but "I did not predict it would be by a private firm."
An acquisition was inevitable, because "Open Solutions had peaked" in Wall Street's eyes, he said. "They are primarily a credit union solution provider. Credit unions are small. Credit unions don't spend a lot of money. For Open Solutions to have surpassed the magic hurdle of $1 billion in revenue would have taken forever."
Chris Penny, an analyst at Friedman, Billings, Ramsey Group Inc., downgraded the stock Monday to "market perform," from "outperform," because the offer of $38 a share exceeded his price target by $2.
Open Solutions is an unusual target for a private-equity buyout, he said, because it was not troubled, but to grow it would need to make some moves that may not have been well received on Wall Street, such as lowering prices and making technology acquisitions.
It has good products, and "there's a lot of opportunity here," he said. "It's a fair price."
