When Jack Henry & Associates Inc. purchased Broadway Seymour Inc.'s Liberty software business in June, it drove home just how much this market has shrunk.
Both the Liberty package and Jack Henry's software run on IBM Corp.'s AS/400 minicomputer system, and all but a handful of the banks using them for their core processing systems have assets of less than $2 billion. The number of community banks in the industry has shrunk to roughly 10,000 in the last few years, and given the pace of consolidation, that number will shrink further. With fewer customers for the software companies specializing in this market, the consolidation among banks is now being accompanied by a contraction in the number of their software suppliers.
"We'd been selling less than a dozen new accounts a year," said William Neal, Broadway & Seymour's chairman, explaining why he had put the Liberty business on the block. Nonetheless, Broadway & Seymour is keeping some of its software products that tie into the Liberty package, including a check processing system and a trust program. While the number of community banks drops every day, many of them have not automated all their functions, and Neal says that business will remain viable.
The Liberty business accounted for rotighly 15% of Broadway & Seymour's $132 million in annual revenue, and its significance to the company's overall operations has declined in recent years. Most of the firm's business has been focused on branch-automation and personal computer software for large banks.
Jack Henry's acquisition cost of $12 million was at least a 20% discount to the $15 million to $20 million a year in revenue generated by the Liberty software. Neal acknowledged that the price reflected the limited prospects for core processing systems at community banks. The shrinkage in the industry has not escaped the notice of Mike Henry, chairman and chief executive of Jack Henry, who called it "an area of concern." But he also noted that a number of his company's customers have made acquisitions themselves, and while the community banking market is shrinking, it won't disappear.
Neal believes the market is still "very viable." It's just not large enough to support six or more major competitors.
The deal between Jack Henty and Broadway & Seymour followed by a few weeks the completion of FIserv Inc'.s acquisition of Information Technology Inc., which also supplies minicomputer sofware to COMMUNITY banks, although its programs are written for Unisys Corp. hardware.