Flush with capital, private equity companies have demonstrated a willingness to spend huge sums acquiring banking technology vendors that in the past may have seemed out of their reach.
Observers say the buyout specialists are drawn to the steady income generated by transaction processing. But even though there are clear advantages to being taken private, some of the vendors that might someday receive such a bid are concerned about how these investors might affect their marketplace.
Some fear private equity owners might view their businesses as cash cows. Others say that even a whiff of attention from the private equity market could scare off potential customers.
Nonetheless, most observers agree more acquisitions are likely.
Carla N. Cooper, an analyst at the brokerage firm Robert W. Baird & Co., said that two recent deals have established a benchmark for what companies might be worth, and that more banking technology companies may be weighing going private.
Last month a consortium of seven private equity companies announced that they would buy SunGard Data Systems Inc., a provider of disaster recovery, transaction processing, and other software and services, for $11.3 billion. It would be the second-largest leveraged buyout in U.S. history.
But even before the SunGard deal was announced, it was clear that private equity companies were keen on banking vendors. In December a pair of equity firms agreed to spend $500 million for a 25% stake in Fidelity Information Services Inc., the banking technology unit of the outsourcing and title insurance provider Fidelity National Financial Inc.
In a note to investors last month, Ms. Cooper named several companies on her coverage list whose business model is similar to SunGard's and whose value could be similar to SunGard's. They included Bisys Group Inc. of New York and Fiserv Inc., which both have big core processing outsourcing operations that serve banks.
"There is a new appreciation for what the private market values are," Ms. Cooper said in an interview. "I believe that some people would say" the SunGard deal has put the entire banking technology sector into play.
Bisys would not discuss its plans. Leslie M. Muma, the president and chief executive of Fiserv, said, "We're not doing anything, but if we were, I wouldn't tell you."
Mr. Muma also said he was not thrilled by the idea of private equity funds' moving into his market. Though he said he understands the appeal of financial processing - "it throws off a ton of cash" - he also said the structure of such deals could be detrimental to the acquired companies.
Fiserv, of Brookfield, Wis., is the largest outsourcer serving the banking market.
Because of the price tag some of these vendors may command, the buyers have to "leverage it up to the eyeballs, and then they need the cash flow to finance the debt," Mr. Muma said. "You've got to be careful that you don't milk the cash flow at the expense of service to the customer."
The notion that private equity companies are poised for a shopping spree has clearly struck a nerve in the banking technology industry. More than a dozen vendors were contacted for this story, but very few were willing to talk about the issue. Most refused requests for interviews or did not return phone calls, and others would speak only anonymously.
One executive, who requested anonymity, said that even mentioning his company in this context could raise doubts with potential customers about its long-term viability and could reduce sales.
However, the executive also said that going private would offer some advantages. The heightened regulatory scrutiny and the growing cost of compliance have become burdens, as has the constant pressure to deliver quarterly gains to Wall Street, the executive said. "When you go through some of the junk you go through as a public company, there are times when you think there's no way that it's worth it."
Gary Cawthorne, the managing partner of the global banking practice at Unisys Corp. of Blue Bell, Pa., said that private equity investors could help vendors sort out their portfolios after years of acquisitions.
"For the last 18 months or so there has been a frenzy of large companies buying up smaller companies," and the buyers often end up with overlapping and competing product lines, he said.
Several vendors "have accumulated a lot of companies that will have to be rationalized" over the next few years, either by consolidating lines or, more likely, spinning off redundant units, Mr. Cawthorne said. "The customers are wondering when that rationalization is going to occur."
Private equity companies could provide an exit strategy for vendors' unwanted business lines, Mr. Cawthorne said.
Richard Garman, the managing partner at FTVentures, a San Francisco private equity firm with more than $600 million of assets under management, said there is a lot to like about the vendors, especially processing outsourcers - they have high levels of recurring revenue and are stable, highly automated, and scalable businesses.
These characteristics make them "attractive from a private equity perspective," Mr. Garman said.
Robert Hegarty, a vice president at TowerGroup, a Needham, Mass., market research unit of MasterCard International, agreed that banking vendors are a natural fit for private equity investors.
"Private equity firms are financial companies themselves, so they're more inclined to understand financial technology, as opposed to manufacturing or health care or retail," he said.
Private equity companies are clearly shifting their strategies, he said. In the past they often bought struggling companies, took them private, and tried to turn them around. The return, often realized years later, would come by selling the company or taking it public. The new model is to purchase a healthy company that can generate returns immediately, Mr. Hegarty said.
Mr. Hegarty predicted that the SunGard deal would be a catalyst for similar ones. "It's going to send the investment bankers and dealmakers out beating the bushes," he said. "Sometimes it takes one deal to break the logjam, and I think this could be such a deal."
Fred Wainwright, the executive director of Dartmouth College's Center for Private Equity and Entrepreneurship, said that with so much capital available to spend on a finite number of companies, competition for deals may drive up prices. "There is a lot of institutional money that is looking to be placed," he said.
Deborah Williams, a vice president with Financial Insights Inc., a Framingham, Mass., unit of International Data Group Inc., agrees that competition for vendors is on the rise.
"Industry consolidation and relatively slow industry spending have left slim pickings for those looking to buy up a high-growth start-up and make it big," Ms. Williams wrote in a note to clients after the SunGard deal was announced. (It is expected to close in the third quarter.)
In fact, she wrote that these days financial technology vendors seeking financing might be more inclined to turn to buyouts than to initial public offerings. Both SunGard and Fidelity National had been working for months to spin off parts of their business - by floating new stock in the public markets - when they were approached by private equity firms.
"We expect others will be open to alternatives like the SunGard LBO for similar reasons," Ms. Williams wrote.
