M&F Worldwide Corp., a New York holding company that owns the No. 3 check printing company, announced Wednesday that it is buying its larger rival, John H. Harland Co.
The move would remake the top tier of the check printing industry, potentially stabilizing price wars in that market. At the same time, it calls into question a proposed spinoff of Harland's financial software unit - an active player, and acquirer in its own right, in the highly competitive banking technology arena.
In the press release announcing the deal, M&F Worldwide chairman and chief executive Howard Gittis called attention to the financial software company as one of "two unique assets."
Were M&F to keep the software company as an integral part of the merged firm, it would appear to reverse the plan that Harland's chairman, president, and CEO, Timothy C. Tuff, laid out last month. During the Atlanta company's third-quarter earnings call, he said it was considering merging its Harland Financial Solutions Inc. unit with its Scantron educational testing unit, and then spinning them off together. (Scantron is the other of the two unique assets cited by M&F.)
Harland's stock rallied on Mr. Tuff's early November mention of the spinoff idea, and rallied further on Wednesday's news of the M&F deal. M&F Worldwide said it would pay $52.75 per share for the company - a total of $1.7 billion in cash and an 18.6% premium over its closing price Tuesday.
Representatives of M&F would not provide executives to discuss the deal, citing a pending regulatory review. Representatives for Harland did not respond to requests for comment Wednesday.
Analysts were divided over what the deal would mean to Harland Financial Solutions.
Bob Meara, a senior analyst at the research firm Celent LLC of Boston, said that M&F probably has a strategic vision for Harland's software unit. "M&F didn't buy Harland for their check printing alone, not for over $1 billion," he said. "I would think M&F's interest would be in Harland's technology business."
However, Robert Hunt, a senior analyst at TowerGroup of Needham, Mass., a market research unit of MasterCard International, said he expected M&F would eventually spin off Harland's technology unit.
"I believe this is a way station for Harland Financial Solutions," Mr. Hunt said. Although Harland had been fairly successful in using its check printing relationships with banks to make technology cross-sales, the two businesses are very different, he said.
The analyst said Harland's technology unit would become a much smaller piece of a much larger check printer, which could prompt an exodus of talent.
"You put yourself in jeopardy of losing key people any time you do this kind of deal," he said. "In my opinion, it would be in everybody's best interest to do a turnaround, spin this thing off."
A Wall Street analyst, who did not want to be named because he does not follow Harland, said M&F might consider selling off the technology unit to help pay down the debt it will incur to fund the Harland acquisition. The analyst, who covers other companies in the financial technology market, speculated that other financial technology vendors could be eager to pick up the Harland unit. He cited Fidelity National Information Services Inc., which just completed a spinout from its own corporate holding company owner, or Open Solutions Inc., which is undergoing a private equity takeout, as possible takers.
M&F said it expects to finance the deal with new borrowing and already has financing in place. M&F's largest individual shareholder, with 38% of the shares outstanding, is MacAndrews & Forbes Holdings, which is controlled by Ronald Perelman. (See sidebar
The combined company would carry a heavy debt load. M&F reported $1.1 billion of liabilities in its Sept. 30 financial statement, against assets of $1.5 billion. It has a market value of just over $400 million, compared with Harland's market capitalization of just under $1.3 billion. Harland, for its part, reported liabilities of $502 million and assets of $805.1 million.
The check printing industry has been consolidating in recent years as check volume declines. Harland acquired a smaller check printing rival, Liberty Enterprises Inc., in June 2005 for $160 million. And M&F entered the check industry by purchasing Clarke American Corp. of San Antonio in December 2005 from Honeywell International Inc. for $800 million in cash.
Harland, Clarke, and Deluxe Corp. now make up nearly the entire U.S. check-printing industry, but this deal will remake the business.
Deluxe has long been the largest, and in the first nine months of the year its check-printing operations generated $509 million in revenue; Harland was close behind with $493 million, and Clarke had $474 million.
John Kraft, an analyst at D.A. Davidson & Co., said the M&F check printing rollup plan will "change the landscape, maybe for the better."
The check printing business has been marked by "bloody pricing wars" as the vendors competed for contracts to print checks on behalf of banks, Mr. Kraft said. If M&F has to borrow to support the deal, it might "be more disciplined in pricing."
Mr. Kraft said the printers also carry low earnings multiples, making them relatively cheap to acquire in a hot merger market. "Public markets don't seem to find much excitement in check- printing vendors," he said. "Maybe Ron [Perelman] can make a ton of cash and not have to worry about being in a cool business."
Charles Strauzer, an analyst at CJS Securities Inc. of White Plains, N.Y., agreed that the consolidation could curb the price competition for check printing.
"In a business in secular decline like checks, when you get two of the bigger players coming together, you can rationalize pricing and get supply and demand more in balance," he said.
The analysts said the biggest potential threat to the deal would likely be the prospective antitrust review by the federal government. No rival bidder is likely to emerge to challenge M&F's deal, they said.
In a regulatory filing, Harland said that under the purchase agreement it will have to pay M&F $52.5 million if the agreement is terminated under specified circumstances because of a counter bid.
M&F would have to pay Harland a similar amount if the merger does not receive anti-trust approval, as well as $12 million in relation to certain retention bonuses.
The Federal Trade Commission did not return a call requesting comment.
The companies said in a joint press release that their boards had approved the deal, which they expect to close in the second half of 2007.
Though M&F said Clarke American and Harland would continue to have a commitment to their respective hometowns of San Antonio and Atlanta, analysts speculated that the merger could lead to plant closings as the combined company consolidates its operations.
The merged company would have operations in more than 20 states. "M&F Worldwide, Clarke American, and Harland have extensive experience in acquiring and integrating companies which will facilitate the realization of operational efficiencies," Mr. Gittis said in the announcement.
John H. Harland's shares rose 13.1% Wednesday to close at $50.31. MFW rose 12.0% to close at $20.49.
