The financial transformation of bank vendors will probably sharpen competition and could be a catalyst for innovation in the transaction processing industry, analysts said Tuesday.
With so many vendors in the throes of change, it may not be clear for some time where the competitive advantage is likely to lie. One question is whether the re-engineering or changes in ownership that are sweeping through financial technology's top ranks will bring about a round of investment or just result in a wave of cost cutting.
The Milwaukee banking company Marshall & Ilsley Corp. said late Tuesday that it had agreed to a $4.25 billion spinoff of its technology subsidiary, Metavante Corp. The private-equity firm Warburg Pincus is to pay $625 million for a 25% stake in Metavante, and M&I is to receive $1.67 billion.
Dennis Kuester, M&I's president and chief executive, said that the banking company and the vendor would both be able to grow faster. "In the last year, we've had multiple opportunities both on the bank side and the Metavante side where, if they'd all come together at the same time, we would not have been able to serve them," Mr. Kuester said in an interview.
First Data Corp. cast its deal Monday to sell itself to Kohlberg Kravis Roberts & Co. as an efficiency play. It said that as a private company it will have more flexibility because it will worry less about the drag of technology investments on its quarterly results.
Matthew J. McCormack, an analyst at Friedman, Billings, Ramsey & Co., said clients should see a benefit from the changes. "The private-equity guys are there to increase value and to increase their own value. That's by providing a good service for the clients," he said.
Other analysts were skeptical that financial buyers would be the kind of purchasers to facilitate broad strategic changes rather than efficiency-oriented ones.
"When private-equity guys buy a firm, they often focus first on cost cutting rather than growing revenue," opening a door for rivals to try to take away their business, said David J. Koning, of Robert W. Baird & Co.
John Kraft of D.A. Davidson & Co. argued that such financial deals means less to the market than strategic vendor rollups.
"The two deals this week shouldn't change the competitive landscape much at all," Mr. Kraft said, characterizing them as financial transactions rather than strategic transformations.
In contrast, he said several recent deals do have strategic implications, including CheckFree Corp.'s agreements to acquire both Carreker Corp., a provider of check processing software and consulting services, and the online banking software maker Corillian Corp. He also mentioned the deal by the software maker Intuit Inc. to buy the online banking outsourcer Digital Insight Corp.
"You could make an argument that those are strategic and could change the competitive landscape," Mr. Kraft said.
If nothing else, the deluge of deals underscored what has been an accelerating realignment of the vendor marketplace, not all via the private-equity or acquisition route. Of the top 15 companies in American Banker's FinTech 100 list last November, at least 11 are undergoing or have recently completed some kind of organizational change. Fiserv Inc. of Brookfield, Wis., for example, is drastically reducing the lines of business through which it operates.
Fidelity National Information Services Inc. of Jacksonville, Fla., split in November from its majority owner, Fidelity National Financial Inc., after it combined with the payment processor Certegy Inc. of St. Petersburg, Fla., in January of last year to become a public company.
Linda Gridley, the president and CEO of Gridley & Co., a boutique investment bank, said the key question is what capabilities the banks want to own in-house and what they are content to buy from vendors.
She noted that the card networks MasterCard Inc., which went public in May, and Visa International, which is planning to go public, have been quiet about their own acquisition strategies. Meanwhile, banks have been investing in new payment systems, such as Citigroup Inc.'s March purchase of Ecount, a prepaid cards provider.
"The banks have looked at stuff, but they can't hold their nose enough to pay the big prices," Ms. Gridley said. "The networks and the banks are the two groups to watch in the next five years."
