Concentrex Inc., a vendor with a 22-year history of providing software to the financial services industry, has agreed to be bought out by the check printer John H. Harland Co. for $140 million in a deal announced Monday.
Concentrex, of Portland, Ore., appears to be a victim of its own ambitious plans to expand beyond its roots as a supplier of compliance software to community banks. Three acquisitions aimed at raising its Internet banking profile pushed the company into default with its lenders.
"Our financial position with our lenders is a principal reason we have chosen to sell the company," said Matthew Chapman, chairman and chief executive officer of Concentrex, formerly known as CFI ProServices.
Harland would give its customer base a big boost and round out its product line through the acquisition, which is expected to close in August. In addition to supplying checks, the Atlanta company provides database marketing software, direct marketing management, and loan and deposit origination software to 1,700 financial institutions. Concentrex has 5,500 financial institution customers.
John O'Malley, vice president and general manager of Harland Software, said he envisions integrating Harland's marketing software into Concentrex's Internet banking software. Both companies target credit unions and community banks.
"It was the products that took us to Concentrex," Mr. O'Malley said.
Concentrex, which fell 30% short of projected revenue in the fourth quarter of 1999, was ready to talk. The revenue shortfall strained its relationship with its lenders, Mr. Chapman said. A sales slowdown connected with year-2000 concerns did not help matters.
Concentrex posted losses in last two quarters of 1999 and for the full year, following 24 consecutive quarters of operating profits. Its net loss in 1999 was $13.9 million, against net income of $3.9 million in 1998.
Things improved a little in this year's first quarter. It posted revenues of $33 million, up $13 million. However, the three acquisitions in 1999 caused combined interest expense and goodwill amortization to increase by $3.7 million.
In those deals, Concentrex purchased the online banking software providers Meca Software LLC and Ultradata Corp.; with the third acquisition, of Modern Computer Systems, it formed the basis of an outsourcing business.
Meanwhile, the company's traditional business of compliance software for loan and deposit origination was stung by the year-2000 sales slowdown.
"We got hit with Y2K, we borrowed to do acquisitions, and our lenders were not supportive of our go-forward strategy, so we sold," Mr. Chapman said.
The company will not be releasing its second-quarter results, which were well below analysts' expectations, Mr. Chapman said.
Concentrex would become part of a company with a balance sheet much better than its own. The Atlanta company's first-quarter net income was $11.5 million, up 15%.
"We believe Concentrex is a fairly solid company with a strong reputation," Mr. O'Malley said. "It had some financial constraints, but we will allow it to continue to grow."
Taking into account Concentrex's loan obligations and transaction-related expenses, Harland would be paying $7 a share to buy Concentrex. The $140 million price breaks down into $46 million of equity (assuming 6.5 million fully diluted shares) and $94 million of debt, certain liabilities, and transaction costs, said Victoria P. Weyand, vice president of communications and investor relations at Harland. "Concentrex became overleveraged," she said. "We expect to be accretive to cash flow by yearend."
Concentrex has 1,100 employees and operates in 12 cities. Mr. Chapman said there will be "some redundancies from this deal, but very few." Ms. Weyand said any overlap would be mostly at senior level.
Meredith Hickman, an analyst at Celent Communications, said the deal is "definitely good for Concentrex, which needs the cash."
But she said Concentrex is "giving away the company for a cheap price" and she questioned whether there are any synergies between Harland's check printing and direct marketing businesses and Concentrex's focus on Internet banking.
M. Arthur Gillis, president of Computer Based Solutions Inc., trashed the deal.
"These two companies never placed on my list of high performers," he said. "Harland doesn't know how to run its own business, so why would it buy someone else's?"
Concentrex "has been struggling to get ahead," Mr. Gillis said. "It has made some wrong moves and didn't have a homogeneous kind of strategy. It jumped around and bought a few companies. It was spinning its wheels."
Concentrex had an "absolute success" with its LaserPro compliance loan and deposit product, Mr. Gillis said, but one product cannot guarantee success. If Concentrex "couldn't make it on its own, I'm suggesting a check printer won't help."