Tech M&A Could Heat Up, Analysts Say

The pace of consolidation among financial technology firms is likely to pick up as more and more banks look to trim overhead by combining services with fewer vendors.

John Kraft, a senior research analyst at D.A. Davidson, said that was the prevailing sentiment among tech executives who made presentations at an investor conference his firm hosted in Seattle this week.

Since banks want to work with fewer vendors, technology firms that offer a limited range of products and services are potential acquisition targets, Kraft said in an interview Friday.

"This allows banks to be focused on others things and not on managing vendors," Kraft said. "There is one throat to choke so to speak."

D.A. Davidson said in a report summarizing the conference that potential acquisition target could include prepaid card marketer Netspend Holdings (NTSP), payments processing software company ACI Worldwide (ACIW), Online Resources (ORCC), which Kraft said is the last large bill pay vendor, and payments software company Bottomline Technologies (EPAY).

Kraft said that potential buyers could include Western Union or core processors like Fiserv (FISV) or Fidelity National Information Services (FIS).

Netspend has been the subject of acquisition chatter in the past. As the prepaid card industry continues to grow, the Austin, Texas, company might be even more attractive to another company or a bank looking to enter this line of business, said Kraft, citing Western Union as a possible acquirer.

"Prepaid is another way to target this massive population of the underbanked," Kraft said. "We finally have something that is working and growth in prepaid has been speculator so there is a lot of buzz."

Smaller firms might also be looking to sell because prices are beginning to rebound. During the last year two companies, Fundtech and S1, were acquired for notable premiums. ACI purchased technology vendor S1 in February for about $540 million in cash and stock while the private equity firm GTCR bought Fundtech, a payments hub, in an agreement valued at almost $400 million. These deals show that "buyers are still willing to pay up for quality products," Kraft said.

Participants at the D.A. Davidson conference also said that increasing stability in the banking industry should lead to greater spending on technology. While this won't mean a flood of new spending, companies are beginning to review projects that were put on hold during the financial crisis, Kraft said.

Financial institutions also are choosing to outsource rather than purchase software and run it in-house, the vendors said.