Panic in the Streets of Glastonbury

Just kidding, GonzoBankers, there is no need to panic. None. At our mothership, Cornerstone Advisors, we’ve been fielding quite a few… shall we say… ”concerned”…… calls from our clients regarding the recently announced decision by Open Solutions Inc. to go private. Private equity investors The Carlyle Group and Providence Equity Partners, as equal partners, are buying OSI with quite a bit of press fanfare. Yep, no more meaningful stock analyst calls for OSI. OSI will now be run by a three-party board consisting of Carlyle, Providence and current OSI CEO Louis Hernandez.

Let’s be clear here. For all the PR and talk (which we’ll get into later), this was about the Benjamins. And who can blame OSI? I bet not many of its shareholders are jumping off tall buildings over this transaction. OSI was purchased for $38/share when the company was trading at $30 at one of the highest multiples in the industry. For a tech company in a tough equity market, not too shabby from a shareholder’s perspective in only three years.

But enough about the shareholders; our greater focus is on the OSI client base, which to some degree is also Cornerstone’s client base.

The consultants at Cornerstone have spoken with seniormost management at OSI regarding this transaction, and we have also chatted with our clients who are also OSI clients. OSI is selling this as a change in ownership, and very little else, for the short term anyway. OSI has stated that hard core cost cutting and management changes are not planned, though a more functional organization structure will be installed (as compared to its current business unit org structure). OSI has explained this as a time to invest more, not less, with the exit of quarterly earnings pressure. The following is a summary of what we’ve heard so far and, of course, my take on what it means to OSI clients and prospects alike.

OSI Goes to China – OSI management made it very clear to Cornerstone that their plans are to grab global market share; they’re going international – and much deeper and wider than their current foray into Canada. OSI is now talking about being a legitimate international core player. “We’ll be a global solution serving institutions across the world,” said Hernandez to the Cornerstone gang. When asked how that will affect the company’s existing and prospective customers, OSI used examples like domestically deploying advanced payments technology now used in Canada. OK, I can see this working in the long run, assuming some compatibility in the United States and Canadian payment systems. That example may be a stretch, but I’ll go along with it as a long term vision. Which leads us to our next discussion item……

Long Term Perspective – Easily the most ballyhooed aspect of this new ownership structure is how OSI will now have the luxury of taking a long term perspective in its decision-making. OSI management is now thinking in terms of seven-year IRR goals, not quarterly earnings reports. OSI management is talking about greater ability under the new ownership structure to make investments in R&D, infrastructure and facilities – all investments that may not have been possible when the company was public due to the costs and resultant earnings hits.

Some of my favorite banking clients are privately or family-owned. One of the reasons I like them so much is that they have the luxury of thinking long term – really creating a franchise over time as opposed to working as a slave to stock analysts. On the other hand, sometimes those same banks can lack the sense of urgency that lights a fire under their publicly traded counterparts. So, neither ownership structure is better by definition; it all depends on the execution.

And OSI’s execution in making the right long term decisions is what will make or break this deal for its existing client base. Here are a few key issues to consider:

Acquisitions – An obvious question that OSI clients have is whether the transaction is really just a capital raising technique to churn out even more acquisitions – something that could sidetrack a company already struggling to digest past acquisitions. While OSI maintains that new acquisitions would have happened regardless of the ownership change, it admitted that it may now have better ability to buy companies to provide OSI with its own fraud, security and payments products. Those would all be positives for OSI’s current client base.

However, acquisitions of the following types might not help the OSI client base in the short term or the long term:

• Foreign core providers – OSI wants to build market share and has been outspoken in its desire to go international. Except in the very long term when possibly foreign functionality could become a part of the domestic product, foreign core acquisitions will have anywhere from no to a slightly negative effect on its current domestic client base.
• Domestic core providers – Many financial institutions have reported to us recently that OSI has slipped in the customer service and conversion departments after its recent glut of domestic core acquisitions. Declining conversion experiences and customer service are normal for software companies going through periods of accelerated growth, but that’s no consolation for the banks and credit unions on the business end of that decline. If I’m an OSI customer, I’m hoping that future acquisitions do not mean even more domestic core acquisitions to absorb.
• Ancillary product acquisitions – OSI could definitely use a step up in certain pieces of ancillary functionality such as high end cash management and consumer, mortgage and even business loan origination. However, most OSI clients of ours still report disappointment in the level of integration of ancillary products already in the OSI fold – loan origination and CRM, to name just a couple. The last thing OSI clients want to see is less focus on integrating products that are already in the OSI family.

Financial Transparency – OSI has pointed out that it still has public debt and, as such, will still have public financial reporting responsibilities. Still, some OSI clients and prospects wonder how much financial data will be available if/when that public debt is terminated? One of the few benefits of the industry consolidation that we have been experiencing is the fact that just about all of the vendors that have remained standing are publicly traded, so their financials have been readily available. We can only hope this stays true under the new OSI ownership plan, but I suspect that meaningful financial information on OSI itself is going to become increasingly difficult to find.

So what’s the bottom line, GonzoBankers? This was about Dollars for OSI shareholders in the short term and Potential for OSI clients in the long term.

“You’ve had too much to think,
now you need a wife.
Steady as she goes…..”
–The Raconteurs, Steady as She Goes

In the short term, this is probably going to be a yawner for OSI clients. For existing OSI clients, the spoils of the ownership change are going to be long term if they happen at all. By the very nature of this deal, long term thinking will post long term results. There are just too many moving pieces to prognosticate on whether OSI will be able to convert long term thinking into real, tangible benefits for its existing clients. A lot of things will have to go right for that to happen. If you’re an OSI client holding your breath, waiting for the rain of benefits from the company’s newfound long term perspective, be prepared to hold your breath for a good five years. What’s a few years between friends, GonzoBankers?
–smh

Time to huddle?

If your organization is at a point where an evaluation of your core system game plan is in order, Cornerstone Advisors can help.

Our time proven process guides you through an objective review of your existing core vendor’s functionality and applicability to the organization’s strategic technology vision. We can help you determine if your vendor is giving you a fair and competitive deal. If you decide it’s time for a change, we can help there, too – from an initial needs analysis and RFP development through system selection, contract negotiation and conversion oversight.

We’ve done this many, many times – and we have a long list of satisfied customers to prove it.

Visit our site or contact Cornerstone for more information.