HNC Software Inc. has shelved plans to buy Open Solutions Inc., a provider of core processing software to banks, amid concerns about the drag the deal might have on already slowing earnings.
Shares of San Diego-based HNC, which specializes in neural network systems for detecting fraud and to serve predictive functions, dropped $3 last week, to $28.50, after the company warned analysts to temper their expectations about the next several quarters.
Despite a generally favorable fourth-quarter earnings report, HNC is growing "fairly rapidly" and must spend more on operations and hire more technologists to manage its growth, said Ray Thomas, HNC's chief financial officer.
Open Solutions, which increased its customer base last year by 45%, to 102 banks, is anticipating slower growth because of year-2000 complications. That is less of a concern for HNC, whose products are less intrusive to a customer's technology.
"It probably did not make sense for us to do a merger right now," said Michael D. Nicastro, vice president of Open Solutions in Glastonbury, Conn. "HNC is an earnings-focused company."
The companies intended to integrate HNC's general ledger and asset- liability software with Open Solutions' core banking system, which would let banks perform advanced customer profitability analyses.
Mr. Nicastro said most banks have completed their Y2K testing to the satisfaction of regulators and do not want go through the effort again with a new core banking system.
This one-time event will lead to "a flatness in the number of sales in 1999," he said.
It is not the first time that market conditions have hampered Open Solutions' plans. The company had filed a registration statement last summer for an initial public offering, but it scrapped that transaction in September amid the market slide.
Instead, Open Solutions agreed to a buyout bid from HNC for stock valued at $120 million. HNC planned to issue about three million shares to cover the deal.
But HNC's stock price has fallen 35% since the deal was announced in September, and Open Solutions' board did not want to settle for less than the negotiated amount.
"There was some attempt at renegotiation," Mr. Nicastro said, but "we were going in opposite directions."
HNC hopes to salvage the relationship with a minority investment in Open Solutions and a strategic alliance, Mr. Thomas said. That could include a joint marketing relationship and selected product integration.
Mr. Thomas said his company is "absolutely interested" in revisiting a possible deal after the 2000 issue passes.
"It was bad timing," he said. "The business is actually quite strong."
HNC reported revenue of $52.6 million for the fourth quarter, a 64% increase from a year earlier. Net income at 27 cents a share was up 50%, slightly better than the Wall Street expectations tracked by First Call.
HNC shares fell last week as the company warned investors to lower their expectations. Wall Street's consensus earnings estimate for 1999, which was up $1.26 to $1.27 a share, was lowered to between $1.18 and $1.20.
"Slowing growth always makes investors nervous," Mr. Thomas said.