Electronic Payment Services Inc., the transaction processing powerhouse owned by five major banking companies, dismissed 26 employees last week.

The turmoil has given rise to speculation that the company, best known as operator of the MAC automated teller machine network, may be preparing to sell out to a bigger concern.

That would likely be seen as an ignominious end for a company formed with great fanfare and high hopes just three and a half years ago.

"EPS had a great engine, but they've run it into the ground," said a knowledgeable industry source who was once associated with the company.

"EPS has not been producing the numbers, and the equity partners are tired of forking over money," added the source, who, like most others contacted for this article, asked not to be identified. "I don't blame the partners for refusing to dump any more money into this organization, because management simply doesn't know what it is doing."

Among those dismissed were chief financial officer Richard C. Schwenk, chief technology officer Jeff Michel, and public relations manager Barbara A. Link. Also gone are virtually the entire legal department and middle- to upper-level executives in the marketing, human resources, and security departments.

Long before last week's actions, several long-time executives had left the organization. Douglas Anderson, the first chief executive officer and a moving force in MAC since its original launch within CoreStates Financial Corp., went into the consulting business in 1994.

John R. Beran, who had been president of the MAC network, stepped down early last year to become chief information officer at Comerica Inc. in Detroit.

"There's no one left with any brains," a second source said. "Anybody who understood the company is gone."

A spokeswoman said the Wilmington, Del., company would not release a complete list of the dismissed workers. She said no other dismissals are planned. But some of the 907 remaining employees are worried and say they expect another round of pink slips.

EPS management characterizes the dismissals as part of a long-term strategy to generate new business and develop products.

"We've spent three years building infrastructure," said Melinda Mercurio, EPS' director of marketing. "Now it's time to move into a new phase to take advantage of opportunities that exist in the EFT (electronic funds transfer) world," she continued. "We expect to be finding new investors, finding strategic partners, and acquiring new businesses. Our management is taking proactive steps."

Not so, said ex-employees and industry consultants.

"EPS has had legal suits, a lot of personnel turmoil, regulatory action, and a big problem attracting equity owners," said an ex-employee. "This move is totally reactive. Either this company is for sale or they're preparing to go public."

The first clue that EPS was in trouble came around this time last year, when Mellon Bank Corp. backed out of an agreement to become an equity owner. The Pittsburgh-based bank cited "financial terms and conditions" as the reason.

That left five owners, each with 20%: Banc One Corp., CoreStates, KeyCorp, National City Corp., and PNC Bank Corp.

EPS chairman David Van Lear had said repeatedly that he was interested in adding as many as four equity participants. Minneapolis-based First Bank System was said to have been wooed, ultimately turning down the deal.

By last August, Mr. Van Lear had hired Richard N. Garman, a mergers-and- acquisitions dealmaker from Montgomery Securities Inc. in San Francisco, as president and chief operating officer.

"Hiring Dick Garman was clearly indicative that the company was falling apart," said one banker. "He had to stop the cash flow problems."

"The board was ready to revolt," said another banker. "The company had three disastrous years, with decreasing revenues."

Sources say EPS had $150 million in revenue last year, down from $175 million in 1991. EPS would not confirm or deny those figures.

A leaner EPS might attract acquisition bids from other processing entities like First Data Corp., Equifax Inc., or Electronic Data Systems Corp. All have deep pockets and have shown a willingness to pay well for acquisitions.

The five equity owners would probably be willing to sell for about $450 million, approximately three times revenue, sources said.

"I have no doubt that a First Data would see the strategic value of acquiring this company and would be willing to pay that high price," said one source.

"I don't think for one moment that First Data would be willing to pay that high a price," said another. "I think it's much more likely to go down" as an initial public offering.

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