With one big bite, Open Solutions Inc. plans to more than double in size, and its chief executive says he remains hungry for further growth.
The core-software vendor announced Thursday that it is buying Bisys Group Inc.'s bank outsourcing business for $470 million in cash. The acquisition would add 220 financial institutions to Open Solutions' customer roster, which now numbers 980, and dramatically increase its revenue next year.
Louis Hernandez, Open Solutions' chairman and chief executive, said in an interview Friday that he believes his company can get more out of the unit, which the seller calls its information services group, than Bisys has. Its dim growth prospects were the chief reason Bisys put it on the block in the first place.
This "extends our financial services reach" into new areas, such as asset retention for insurers and corporate banking, Mr. Hernandez said.
Open Solutions, of Glastonbury, Conn., reported revenue of $149.2 million for the four-quarter period that ended June 30. It reported a 116% year-over-year increase in revenue, to $47.1 million, for the three months that ended June 30.
Bisys, an outsourcer serving banking and other financial markets, reported in February that six-month revenue for its information services group was $105.9 million - 3% less than it reported for the year-earlier period. In its last full fiscal year, which ended June 30, 2004, Bisys reported revenue of $220 million for the unit. It has not provided updated reports because it is restating its earnings to reflect accounting problems in its mutual-fund processing business.
Open Solutions said it expects the Bisys unit to contribute $180 million to $195 million of revenue in 2006 and 6 to 12 cents of earnings per share. Mr. Hernandez said he considered those projections conservative. (The deal is expected to close in the fourth quarter.)
In its six previous core-processing acquisitions, which were smaller, Open Solutions typically picked up companies offering older technologies and tried to convert their customers to its own system. It will use a different approach with Bisys, Mr. Hernandez said - it will maintain the Total Plus system the New York company uses for the bulk of its bank customers.
"The Total Plus platform will be an important platform for us," Mr. Hernandez said. "We will continue to invest heavily in it."
Bisys' bank customers are generally larger than Open Solutions'.
TowerGroup, a market research unit of MasterCard International, reported in April that Bisys' largest client was the $25.2 billion-asset New York Community Bancorp Inc. of Westbury. The report did not show Open Solutions with any users among the nation's 100 largest banking companies. It has 3,500 banking customers, and Mr. Hernandez said it is trying to attract more with assets exceeding $5 billion.
Though the banking unit is Bisys' most profitable, its mutual fund processing and insurance businesses are growing faster, and it said that it was shedding the banking business to focus on them. Bisys has been dogged by rumors all year that it was mulling a sale of the banking unit, and Mr. Hernandez said in a conference call with analysts Thursday night that uncertainty about Bisys' commitment to the banking business could have hindered sales.
Mr. Hernandez said the Bisys deal "would not slow down our acquisition strategy," though he acknowledged that the $470 million his company is shelling out could put a big dent in his $208 million of cash on hand. Open Solutions has not said how it plans to finance the purchase.
The Bisys unit is expected to contribute $45 million to $55 million of earnings before interest, tax, depreciation and amortization in 2006, Mr. Hernandez said. "It's a very strong cash-flowing business," he said. "It should allow us to de-leverage in a very short period of time."
Bisys president and chief executive Russell P. Fradin said the price is fair. "We got a very clear reading on the value of the business," he said during a conference call with analysts Friday.
Strategic investors such as Open Solutions and private equity firms showed interest in buying the business, Mr. Fradin said. He described the transaction as a "formal auction process," managed by the investment bank Bear Stearns.
A sale was "the simplest, cleanest solution," and it was "better to get on with it than to be distracted over time" by a business that was not providing the growth Bisys sought, Mr. Fradin said.
Analysts were divided on the price.
Carla N. Cooper at the brokerage firm Robert W. Baird & Co. called it "lofty," noting in a research report that Open Solutions is paying nine to 10 times the unit's expected 2006 earnings before interest, tax, depreciation, and amortization.
But David A. Trossman of Wachovia Securities Inc. said in his report that he thought Bisys was selling too cheap.
"We didn't think Bisys would sell its big cash cow at these levels since the annual cash-flow stream - we estimate $38 million - seems more valuable than the $300 million in after-tax proceeds the company should realize," he wrote.
