Digital Insight Corp., which provides Internet banking software to community banks and credit unions, said Thursday that it would acquire a smaller rival, Virtual Financial Services Inc., for $51 million.
We have felt for some time that the market was a little too fragmented, said John Dorman, the chairman and chief executive officer of Digital Insight.
He also said he had told investors in his most recent conference call that the company would seek acquisitions. Were delighted that our first transaction since that announcement is Vifi.
Mr. Dorman called the Indianapolis-based Virtual Financial the highest quality company that was still operating independently and said that it has the second-largest share of the credit union Internet services market, behind only Digital Insight. Its very strategic for us.
The Calabasas, Calif.-based Digital Insight would pay $7.5 million in cash and $43.5 million in stock. The company has 1,400 institutional clients with 2.2 million end users, while the privately held Virtual Financial has 145 institutional clients with 420,000 end users.
Digital Insight will seek further acquisitions, he said. We do continue to see other opportunities for acquisitions in this space.
David Becker, Virtual Financials founder and chairman, called the deal a win for our client financial institutions and said that, as the industry leader, Digital Insights solutions and superior customer service will enable our clients to continue to build successful Internet branches.
Mr. Becker also is the chairman and CEO of First Internet Bank of Indiana, which uses Virtual Financial software.
Just hours after the deal was announced, Goldman, Sachs & Co. downgraded Digital Insights stock, to market perform from market outperform. However, Michael S. Hodes, an analyst for Goldman, wrote in a research note that the downgrade was a reaction to the stocks recent run-up on the Nasdaq market.
Even though Digital Insights fundamental outlook is largely unchanged, we are incrementally more leery after the stocks 45% gain since Sept. 10, compared with a 15% increase in the same period for the Nasdaq composite, he wrote.
Digital Insight shares closed Friday at $22.04, down 5.5% from a week earlier.
Bill Bradway, a technology consultant and the co-founder of Meridien Research Inc. in Newton, Mass., called the deal another data point along the industry consolidation theme.
Virtual Financials client institutions and their customers would benefit from the acquisition, Mr. Bradway said. Digital Insight continues to invest in their service and their platform. They continue to improve. What they have today is better than what they had a year ago, two years ago, three years ago.
Also, the integration of the two companies would be relatively painless for their institution clients, since both Digital Insight and Virtual Financial are application service providers, companies that offer Internet services to banks and credit unions on an outsourcing basis, he said.
Jeanne Capachin, the research director of e-financial services at Meridien, said the ASP approach should appeal to many institutions.
We think the ASP model makes a lot of sense, especially for second-tier and community banks, she said.
Even though these banks feel the need to offer online services, they typically do not want to build a technical staff to develop and maintain computer applications, Ms. Capachin said. Its becoming more of a commodity and less of a way to flaunt your individuality.
Mr. Dorman said a decision has not been finally made yet about integrating the two companies customer bases. Well be working with Vifi management to come up with a transition plan.
He also said that he expects the transaction to close by the end of next month, and that he did not expect any regulatory issues to hold it up.
Digital Insight said the acquisition would be accretive to earnings this year, but it would not have guidance for investors about the impact until the deal closes.
