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GLASTONBURY, Conn. – Open Solutions Inc. has made another acquisition in the credit union core processing space and says it will again implement its “acquire/convert” strategy. Open Solutions purchased the US Services to Credit Unions operation of Canadian-based CGI, as well as its CyberSuite Product Line. The deal was valued at $24 million. CGI’s U.S. credit union unit reported revenues of $16 million last year. CGI’s U.S.-based CU core processing clients consist primarily of clients from the former C.U. Processing, a Southfield, Michigan-based firm CGI acquired in the late `90s. This deal marked CGI’s exit from the U.S. on the core side. “With respect to credit unions in the United States, we came to the conclusion that the interests of our clients and professionals are best served through our decision to divest and align these operations with Open Solutions,” said CGI President and COO Michael Roach. OSI, once a small privately-owned firm, is now a public company (it’s one year anniversary of going public was last November) with more capital to buy companies – and it’s taking full advantage of that. Its first major deal in the CU core processing space was FiTech, then later RDS (formerly re: Member Data Systems). It also made a huge deal affecting CUs when it bought the popular interactive voice response firm Maxxar last year. OSI has taken a different approach to core processing acquisitions than most vendors serving CUs, says OSI Chairman and CEO Louis Hernandez. For OSI, one of the critical aspects of its due diligence in deciding whether to buy a processor is talking to its CU clients and making a determination of where they want their processing to take them. In other words, do they want to go the next level and move to what OSI believes is the next level – its own core system. While it will continue to support acquired core products, OSI hopes to migrate credit unions off of them over time. As part of that, you won’t hear OSI touting the systems of acquired companies. This contrasts what Fiserv for example does with its more hands-off approach to acquisitions which has worked well for the Brookfield, Wisconsin company over the years. Fiserv has built a multi-billion dollar business on more than 100 acquisitions since it was founded in the mid-80s. “Unlike most of our competitors we don’t market systems we acquire. We don’t buy companies, gut their R&D and try to make a profit. Our approach is we’re trying to change the industry and improve the success of the movement by improving the tools credit unions are using. We want to make it more obvious why at a credit union you are going to get better service,” said Hernandez. That again goes to CUs looking for a more advanced system and being more likely to convert to OSI. In the case of FiTech, OSI’s earliest core acquisition, OSI anticipated it would lose 25% of CU clients, and would only be able to migrate 15 of them over to the OSI system. Hernandez said OSI has lost only 3% of FiTech clients and 62 CUs have decided to migrate to OSI. So is OSI saying it’s buying bad companies with bad systems? Hernandez said no, it’s more accurate to say OSI has bought companies at a crossroads in their processing existence. “In the case of RDS, they were in the middle of a system re-write. It had a client base that said we like the service, we like the people, the culture of RDS – but we really want an updated system,” said Hernandez. He said RDS eventually concluded that the system re-write, though necessary, was more expensive and complicated than they thought. Rather than take the time and money to modernize its system, it decided it would be better served to be bought buy a modern processor, OSI. Any growth takes more management resources. Hernandez claims OSI has been able to maintain its entrepreneurial spirit during its growth spurt – and the reason is because it is only working to improve one system. Credit unions may not know it, but when they purchase OSI’s Complete Credit Union Solution and when a bank purchases OSI’s Complete Banking Solution, they are literally the same systems with different names. In fact there are corporate credit unions, finance companies, bankers banks and other financial organizations using the same OSI system CUs use – the difference is simply what functions OSI turns on or off. OmniAmerican FCU, one of the billion CUs in Texas looking to convert to a bank, recently made the move to OSI. Hernandez said the good news for that CU is it can simply add business functionality already on the OSI system, without having to convert to a “bank” system. “We only retain one line of code. In our world we only have to invest in one system. We don’t have to decide which of the five, 10 or 20 systems we invest in this year,” said Hernandez, who said OSI’s ability to run on any hardware makes CU conversions to its systems less painful. OSI is increasing R&D in ’05 by 40%. “We’re really focused on continuing to make obvious why there is no place for any legacy system to exist in the market today,” said Hernandez. Looking around the CU processing space, Hernandez said firms continue to morph and change the front-end or add middleware, without addressing what OSI says is the heart of the problem – the core. “Globally most technology is being introduced at the layered application level. What we’re saying is eliminate all the layers and achieve your goals more efficiently at the core,” said Hernandez. During the interview with Credit Union Times, Hernandez repeatedly said OSI wants to change things on a “global” level, not just in North America. OSI is already a big player in Canada. It is the largest ATM and POS provider in Canada, driving some 18,000 devices. It acquired Datawest last year that was reselling a system from the former Sanchez. That’s where it picked up a lot of this EFT business, but also some new core business. The CGI deal brings OSI 180 CUs Other than its acquire/convert strategy, OSI also believes in letting other companies resell its system. Hernandez said for some processors at a key inflection point in their existence, they can move to reselling a system rather than get out of DP altogether. That’s what Hawaii Impulse Systems, which serves CUs in Hawaii, and Connection Online Computer Center (COCC) is doing with the OSI system. Hernandez said OSI is not concerned about these firms hurting OSI branding, because they are helping CUs off legacy systems. OSI’s revenues last year were $107 million, and it has told Wall Street it will hit $166 million this year. One way to grow said Hernandez is to sell add on products (OSI has eight) to credit unions, such as online cash management, loan origination, IVR and others. OSI has its eyes on about 10 more products it would like to add, though they’re keeping tight-lipped about what those 10 are. Hernandez did say OSI would like its own COLD storage products. These add-ons help increase contract value. “In ’03 when we sold a core application, we sold 33% more contract value with complimentary products. In ’04 it was up 54%. We think by adding those other 10 products, we may double that,” said Hernandez. OSI Vice President of Product Development Mike Nicastro is one OSI’s longest tenured employees, having been there even before Hernandez came on board. He said OSI is winning CU clients based on its commercial functionality. Credit unions that move to processors who also have bank systems are finding themselves running disparate systems to get that functionality, said Nicastro. With OSI, it’s already built in. Nicastro said as he talks with CU leaders at trade shows he’s surprised by the influx of banking talent coming into the CU industry just to help CUs develop this area. “The talent of credit unions is changing. You find people who were banking leaders, commercial lenders, especially in small business services,” he said. OSI’s contract backlog went from $128.9 million in ’03 to $254 million last year. Still despite its success, especially among large CUs, OSI has a way to go, Hernandez said. It has about 320 CU clients and another 350 bank clients. “We have just begun. We have 670 core clients out of the 23,000 in North America,” he said. OSI also faces competition from a new favorite among large CUs, Fidelity National. The mega multi-billion dollar company, which has the former Aurum Technology’s MISER product in its suite, has already signed up two billion-dollar plus CUs in ’05 – Wings Financial and Virginia CU (see related story page 23). And despite OSI’s claims that its competitors are buying companies and gutting their R&D, leaders of Fiserv’s latest CU acquisition – IntegraSys – say they’ve experienced just the opposite. Scott Butler, president of IntegraSys, said the company has already invested a few million in infrastructure and R&D since being bought by Fiserv just under two years ago. “In our case we have several million dollars additional per year into our products since we’ve become part of Fiserv, and I have seen the same investment going on in other Fiserv companies,” said Butler. He also noted IntegraSys has increased staff by 18% since being acquired by Fiserv almost two years ago, hardly a move of a company looking to cut costs to the bone. IntegraSys has also moved into a new headquarters building and added a number of administrative positions it did not have as part of EDS. It has upgraded the front-end platform of its Premier system, completely rewrote CUBICS Plus in .Net and XML and upgraded CUBE Encore with a front-end rewrite. “The investment is significant, we’re not talking about pennies, we’re talking about multiple millions,” said Butler. [email protected]

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