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April 9, 2009

FIS to acquire Metavante: competitive dynamics and implications

Fidelity National Information Services announced on April 1, 2009 that it has entered an agreement to acquire Metavante Technologies. Both companies are leading providers of financial solutions and payment services to the US banking sector, and this deal will likely accelerate M&A momentum in the banking technology marketplace, bringing about major competitive dynamics implications.

By CBR Staff Writer

Fidelity National Information Services’ (FIS’s) intended acquisition of Metavante Technologies would create a pro forma $5 billion primary vendor to the US banking sector. From an overall revenue perspective, this would move FIS past its main rival Fiserv, which achieved $4.7 billion reported revenues in 2008, although market share (based on revenue) for financial solutions is roughly level. On the payment services side, where Metavante had a stronger relative presence (61% of revenues), FIS also moves into a leading position, with pro forma revenue of $2.5 billion. This is roughly on par with First Data and significantly above FIS’s previous peer, TSYS, which achieved revenues of $1.5 billion in 2008.

Given the financial crisis and significant cost pressures in the US banking industry, this should align FIS well to cope with what is likely to be at least a couple of very turbulent years in the banking technology sector. There is significant margin pressure in the industry, as was already evident for many vendors in 2008 and will continue in 2009. Metavante is accretive to FIS’s cash earnings with higher EBITDA margin and cost synergies should likely see FIS maintain earning levels, particularly as a high proportion of revenue is recurring.

While there is overlap in the offering, Metavante provides an attractive diversification of the client base, bringing greater strength in the second- to fourth-tier US banking sector. Although the financial crisis has affected the banking industry as a whole, FIS’s strength in the top-tier segment did present the risk of consolidation among major clients given recent M&A in the segment. Furthermore, Metavante helps FIS to fill some gaps in its banking portfolio, such as online banking, and gives the company scale in most areas of operation. Cost pressures in the banking sector will drive further vendor procurement consolidation and FIS will be well placed to benefit from this.

That said, the acquisition raises a number of interesting questions. FIS’s international presence is still low (around 22% of revenues) compared to other top-tier technology services companies, and considering the potential of the non-US banking technology market. Metavante is strongly US-centric; it does have some international presence, mainly through its own acquisitions (such as Nomad Payments), but this does not significantly improve FIS’s international position. From that perspective, the acquisition seems more defensive than strategic.

Additionally, product overlap in some key areas will raise concern in some of its client base. In particular, Metavante’s Bankway core system product (from the Kirchman acquisition in 2004) looks potentially at risk given the overlap with FIS’s Profile system. The company will need to decide what its preferred next generation core platform is to be sooner rather than later and, while FIS will almost definitely maintain commitment to Bankway for the time being, clients will be concerned about potential migration plans to a new core in the longer-term.

Similarly, Metavante was in the process of targeting top-tier US banks through a joint venture with Temenos, with its Temenos Core Banking (TCB) platform. Given FIS’s presence in this market, this is likely to be put on a back-burner. On a more speculative note, TCB could be seen as a potential next generation platform for the FIS Systematics product family, given that FIS has kept Corebank outside the US market.

In terms of competitive impact, Datamonitor believes that this deal will accelerate the momentum for M&A in the financial technology vendor landscape, particularly in the US. There are a number of smaller software vendors still servicing the banking market that do not have the scale of recurring services revenue that providers such as FIS or Fiserv enjoy, and with demand and margin pressure likely to remain in the US for 2009 and 2010, being acquired may no longer look unattractive.

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