In response to pressure from an investment group that holds nearly 10% of its shares, S1 Corp. appears to have dropped its resistance to a sale, and has agreed to add a member of the group to its board.
The banking technology vendor said Wednesday that it had retained Friedman, Billings, Ramsey Group Inc. and the law firm Hogan & Hartson LLP as financial advisers and that it was "actively exploring strategic alternatives to maximize shareholder value."
In March, Ramius Capital Group LLC said it was leading an investor group that had bought 5.1 million of S1's common shares, or 7.2% of the shares outstanding - most of it in the prior 60 days. A few weeks later it said it had increased its stake to 9.2% and nominated two directors for S1's board. It also proposed expanding the board by three seats, to nine, and said it would nominate three additional directors in order to win a majority.
S1 agreed to name one of Ramius' nominees - Jeffrey C. Smith, a Ramius managing director - to its board.
S1's executives declined to comment for this article, as did spokespeople for Ramius.
Ramius has praised S1's products but questioned why it was unwilling to consider a sale.
James S. "Chip" Mahan 3d, S1's founder, chief executive, and chairman, has long resisted pressure to sell and has been quick to strike down past rumors that he was considering doing so. Instead he has focused on mending its problems from within.
The rumors were especially strong last July when S1 ousted its CEO, Jaime Ellertson, and named his predecessor, Mr. Mahan, to replace him. Analysts speculated at the time that Mr. Mahan might want to sell the company to a core processing software provider, especially one that served the same market as S1 - small to midsize banks.
Instead, Mr. Mahan reiterated that he was not interested in a sale, and slowed production on the revised version of S1's flagship product, Enterprise, which includes interoperable modules for most banking channels. To take full advantage of the Enterprise technology, banks must buy several Enterprise modules - which can be a significant investment.
S1's financial woes stem in part from an August 2004 change in its pricing structure for its Enterprise suite. The latest version, Enterprise 3.0, is sold through subscription, which generates steady and recurring revenue rather than the usual large up-front cost and smaller recurring maintenance fees that traditional software licenses bring. Though this is a good long-term strategy, the transition period can be painful because each new customer produces much less up-front revenue.
To help spur sales of Enterprise 3.0, S1 announced last month that it would incorporate security software from PassMark Security Inc., now a unit of RSA Security Inc. That plan appears to be paying off; last week Mr. Mahan told analysts that 50 customers plan to upgrade to Enterprise 3.0 products this year.
Gwenn Bezard, a research director at Aite Group LLC in Boston, said he does not believe Mr. Mahan had any designs on selling S1 when he took over in July. "He seemed to feel very strongly about that," Mr. Bezard said.
Still, "S1 has been under pressure" from shareholders, and that "may have forced the company to consider selling," Mr. Bezard said.
He said it is possible but unlikely that S1 will sell off specific assets, because "in the software business, you have to be of a certain size to play."
Given its many relationships with small to midsize banks, Mr. Bezard said, "S1 would make a good fit with" enterprise software vendors such as Oracle Corp. or SAP, or with core processors such as Metavante Corp. (a unit of Marshall & Ilsley Corp.), Fiserv Inc., or Fidelity National Financial Inc.
