Computer Sciences Corp. has been named as a possible target for a private equity buyout, and analysts say that if such a deal occurs, its bank core processing unit could be spun off.
Last week The Wall Street Journal reported that the El Segundo, Calif., data services company, which owns the heavy-duty Hogan Integrated Deposit System software, was in discussions with several private equity firms. The defense contractor Lockheed Martin Corp. may also be involved in the talks as a potential strategic investor.
Robert Hunt, a senior analyst at TowerGroup, a Needham, Mass., market research unit of MasterCard International, said that private equity investors often pare down the assets of companies they purchase to refocus them on their core businesses.
"These companies don't look at the long haul," Mr. Hunt said. "They're purely interested in the short term."
Though the well-regarded Hogan system serves 10 of the nation's 25 largest banking companies - including Wells Fargo & Co., U.S. Bancorp, and Washington Mutual Inc. - it is a relatively small part of the parent company's operations, and Mr. Hunt said the software business would be a likely candidate for a spinoff.
Such a spinoff may be even more likely if Lockheed, which would probably be much more interested in the government contracting operations, is involved. Federal contracts provide about a third of CSC's revenue and nearly half of its operating earnings.
Mike Dickerson, a spokesman for the company, would not discuss whether it is in talks with anybody.
Though several companies could be interested in purchasing the software business, one name that frequently comes up is Fidelity National Financial Inc. of Jacksonville, Fla.
"There are a lot of 'ifs' here," said Bill Bradway, the group vice president of retail financial services at Financial Insights Inc., a Framingham, Mass., research unit of the Boston technology publisher International Data Group Inc. "We would expect Fidelity would be more or less in the pole position for that."
Such a move would make sense, because the two companies are already working together. Fidelity National announced in September that it would offer an outsourced version of the Hogan software, which had previously been available only for in-house installation.
Fidelity National has been an aggressive acquirer of banking technology in recent years and "is well equipped to play in that space," Mr. Bradway said. "We would expect them to be very interested [in the software business] if such a scenario unfolded."
Daniel Kennedy Murphy, Fidelity National's senior vice president of finance and investor relations, said, "We cannot comment on what CSC is or isn't doing."
Analysts also mentioned Fiserv Inc., a Brookfield, Wis., provider of technology products and services to banks, and Metavante Corp., the technology subsidiary of the Milwaukee banking company Marshall & Ilsley Corp., as potential acquirers.
Both Fiserv and Metavante have historically served small banks, but both have become more ambitious in pursuing the high end of the market.
Fiserv has long grown by acquisition. In June it bought Interactive Technologies Inc. of Summit, N.J., whose Advantage Fee system automates complex billing arrangements. The acquisition gave Fiserv some new customers, including many large banking companies it has not historically served. The Hogan software is aimed at the big-bank market.
Mike Muckian, a Fiserv spokesman, said he could not discuss its acquisition plans.
Metavante offered only outsourced core processing services to banks until it purchased the Orlando core software company Kirchman Corp. in May of last year. Banks can use Kirchman in-house or outsource the work.
This month Metavante acquired Brasfield Corp. of Birmingham, Ala., which offers Kirchman outsourcing services.
Chip Swearngan, a Metavante spokesman, would not say whether it has any interest in the software business.
Mr. Bradway said the business also could attract the interest of other large database companies trying to crack the U.S. banking market. He mentioned the German technology giant SAP AG, Oracle Corp. of Redwood City, Calif., and the Indian vendor Tata Consultancy Services Ltd.
SAP, which offers a core processing system in Europe, has been attempting to win U.S. bank customers. Oracle announced plans in August to acquire a majority stake of the Indian core processing developer i-flex solutions ltd., which offers one of the world's fastest-selling core systems but has few U.S. customers. Tata provides outsourcing services to a variety of industries, including banking.
An SAP spokeswoman would not say whether it is interested in the business. Representatives of Oracle and Tata did not respond to requests for comment.
Patrick M. Burton, an analyst at Citigroup Inc., said it might make more sense for CSC to merge with Electronic Data Systems Corp. of Plano, Tex. Though he said he had no knowledge of such talks, he said the two companies could become a stronger competitor against International Business Machines Corp. and offshore outsourcers.
An EDS spokesman said it could not comment on such speculation.
Mr. Hunt said that such a deal could still lead to a spinoff, because EDS, which has long served the financial services industry, has largely exited the core processing business in recent years.
It currently provides check processing services, including printing image replacement documents, but it spun off its community bank core processing outsourcing business in 1999. Fidelity National bought the spinoff, Aurum Technology Inc., last year.
In 2003, EDS sold its Credit Union Industry Group to Fiserv, which renamed it IntegraSys.
Even if CSC is not bought out, Mr. Bradway said, it still might sell off the software business if potential bidders show interest.
"I'm being a bit speculative here," but if a competitive auction were to develop, "that usually means something happens," he said.
