the green light flashes, the flags go up.
churning and burning, they yearn for the cup.
they deftly maneuver and muscle for rank,
fuel burning fast on an empty tank.
reckless and wild, they pour through the turns.
their prowess is potent and secretly stern.
he’s going the distance.
he’s going for speed.
she’s all alone
in her time of need.
because he’s racing and pacing and plotting the course,
he’s fighting and biting and riding on his horse,
he’s going the distance.
–The Distance, Cake
Yep, it was big if not unexpected news in the world of bank tech geekdom when OSI reported that it will buy BISYS in a $470 million cash-for-stock deal. The transaction reflects multiples of 9.5X EBITDA and 2.5X revenue. GonzoBanker’s take on this deal is that it was primarily a market share grab by OSI, though OSI will inherit a few data centers and some management expertise from BISYS. OSI paid a bit of a premium for a business unit with waning (at best) market momentum, but most analysts agree that the deal will be accretive.
OSI is clearly the most logical purchaser for BISYS. I’m not sure I buy the press release hinting that the BISYS and OSI management teams are joyfully holding hands and singing “Kumbaya,” but the two companies do know each other well:
Let’s look at the stakeholders in this transaction:
OSI is the spindly twerp who, after suffering years of public butt-kickings, ’roids up over the summer and finally cracks the schoolyard bully square in the eye. Let’s give credit to the noteworthy progress OSI has made in a very short period of time. Given the poor success rate of other client/server core vendors and OSI’s years of unprofitability, many knowledgeable bank tech observers (and vendor competitors) often questioned the relative newcomer’s long term viability. However, in only around 10 years of operations, OSI has bulked up from a start-up in a garage apartment to a real company – a profitable, publicly traded, multi-product, multi-industry, multinational corporation with roughly $350 million in revenues. Better be careful what you ask for.
If there is anything that smells a little foul in this deal, it’s OSI’s assertion that it will “continue to invest heavily in [the BISYS TotalPlus platform].” Given TotalPlus’ ancient technology and lack of client base growth versus that of the OSI TCBS/TCCUS platform, it could be difficult to justify much more than regulatory and other mandatory investments when it comes to R&D funding for TotalPlus.
One facet of this transaction adored by the investment analyst community is the cash cow status of TotalPlus. If TotalPlus is a cash cow and we know about its lack of revenue growth, it’s pretty safe to say that
OSI management will have to prove its ability to run a multi-product company while converting hundreds of acquired core customers, integrating acquired ancillary products, developing and integrating its own new relationship management, in-house credit card and CRM products, and maintaining its fast-moving, entrepreneurial look and feel. Oh, and then there’s the issue of keeping existing clients happy. It’s a problem with which even the most established tech companies struggle mightily and an issue that existing OSI customers have to be sweating. Will OSI deliver a believable story to BISYS customers, the banks that really will make or break this deal? Read on.
Current BISYS Customers
OSI has been on an acquisitive tear, particularly after going public. In roughly the past two years OSI has purchased at least six core players (re:Member, SOSystems, Datawest, EastPoint, FiTECH, and portions of CGI), and it has purchased numerous ancillary systems to round out its ancillary product suite (Maxxar, Financial Data Solutions, COWWW Software, etc.).
In previous core deals, OSI has either explicitly or implicitly stated that the acquired core customers would be moved to the TCBS/TCCUS platform, and OSI has been unusually successful in its retention efforts. Even though OSI’s CEO, Louis Hernandez, says that “TotalPlus will be an important platform to us,” BISYS users are likely (and rightfully) skeptical regarding the new owner’s ability and willingness to operate a multi-platform company for the long haul.
Let’s get two things straight about BISYS customers. First, they tend to be pretty straightforward thrifts with a need for rock solid but not spectacular technology. If forced to write a list of BISYS customer attributes, “technology snobs” would not make the Top 10. Second, a big reason banks still run BISYS is that the product is cheap. Inexpensive speaks loudly with this crowd, Bubba.
It’s no dark secret that in recent years BISYS has been very aggressively pricing itself to clients when contract renewal time hits. Combine that with the fact that, given the two companies’ marketing relationship, a good number of BISYS clients have already seen and passed on the OSI product. How low will OSI have to go to retain these BISYS users, and can OSI afford to go that low?
If I’m a smaller BISYS customer, I’m worried about a semi-forced migration to the more expensive and more complex OSI platform, no matter what the press releases say. One has to look no further than the track record at previous core acquisitions that OSI (and most of the rest of the industry for that matter) has made. History speaks louder than press releases. To be sure, there will be some BISYS clients who welcome the opportunity to perhaps cheaply migrate to the newer OSI product. I just have to think that techno-hogs who would flock to OSI’s technology are few and far between in the remaining BISYS client base.
If I’m a larger TotalPlus client, I’m first of all relieved that the waiting game is over. Nothing is more unsettling than waiting for your core provider to be acquired. Those that believe OSI’s story about continued investment in TotalPlus will take comfort in the possibility of future functionality richening. However, most big TotalPlus clients are not running the product for the technology. They are still there because the product works, and it is relatively inexpensive and positioned to allow a large bank to cheaply migrate and operate acquisitions.
Large BISYS clients are probably concerned about what will happen to the ancillary products surrounding core. Will OSI force them to offload the substantial investment some have made in Siebel in favor of OSI’s own CRM solution? Will OSI force-feed its own Internet banking and cash management products in lieu of the existing DI arrangement at so many BISYS customers? How do OSI’s ancillaries compare functionally with those in the BISYS arsenal? These questions are likely top of mind at the large BISYS users right now.
Big BISYS clients are probably not too concerned about being strong-armed into an OSI migration. They know that OSI knows there is no way a $20 billion bank is going to move to OSI’s client/server architecture any time soon. OSI has some work to do to prove itself scalable for $10 billion+ banks and thrifts. (We’ll define “scalable” as several proven installations, not “scalable” as defined by a third party benchmarking study.) OSI will also need to garner some credibility when it comes to large bank commercial banking functionality. OSI has stomped terra over the credit union industry, but it still has a credibility and market momentum gap with commercial bank CEOs and CIOs. Only when TCBS proves itself on the scalability and commercial banking fronts will it earn status as a long term option for the big boys running BISYS.
One thing is for sure in this deal. ACT! databases nationwide are being strangled with “BISYS” and “TotalPlus” queries. While TotalPlus users have been fodder for competing core reps for some time, now there is blood in the water. OSI competitors will be assaulting BISYS clients with phrases like “debatable scalability of the OSI product,” “questionable dedication to the TotalPlus platform” and “distracted.” This deal did nothing but chum the waters for OSI’s competitors.
A stronger bank tech competitor is nothing but good for the industry, and OSI has made some serious strides in a relatively short period of time. But OSI has to clear some colossal financial, client management, technology and reputation hurdles to make the BISYS deal work. OSI clients, BISYS clients and OSI shareholders are all holding their breath over this transaction. Can’t wait to see if anyone has a good reason to exhale sometime soon.
the arena is empty except for one man,
still driving and striving as fast as he can.
the sun has gone down and the moon has come up,
and long ago somebody left with the cup.
but he’s driving and striving and hugging the turns.
and thinking of someone for whom he still burns.
–The Distance, Cake
Mad props to