WEST PALM BEACH, Fla. – Don't look now credit unions, but data processor Open Solutions Inc. has gone from being a lean and mean privately-held company, to a public firm that is gobbling up companies to gain market share. The company's most recent grab is BISYS' Information Services Group. It paid $470 million for the unit that does processing for 220 financial institutions. Some observers felt the $470 price tag was too steep, but OSI is confident in the move. "BISYS is kind of a continuation of our goal of becoming the de facto standard globally," said Louis Hernandez, chairman and CEO of OSI. BISYS and OSI have had a relationship since 1997. BISYS actually resells the OSI core solution in data center mode, as well as a number of complementary OSI products. BISYS in fact helped OSI get off the ground with funding. BISYS used to have a seat on OSI's board, but cashed out and relinquished that role. For BISYS this marks an exit from the core processing business. "Our decision to sell this business to OSI is predicated on the idea that we want to focus our assets in the investment and insurance areas," said Dan Biggs, VP of finance for BISYS. He noted that on the core side, BISYS hasn't been able to market to CUs because of an agreement with OSI. OSI has become increasingly more competitive in the credit union data processing space over the years and now it is becoming a market share leader. It currently has 545 core system CU clients. Much of this mass came through acquisitions such as FiTech, re:Member Data (RDS), and CGI's U.S. core processing business. Its organic growth with the OSI core has come from the large asset CUs. Hernandez wants OSI credit union clients to know this deal will indirectly help them. "What this will do is add a lot more scale. It nearly doubles our size," said Hernandez, who noted it could add $200 million in additional annual revenue. "Because they're mostly outsourcing providers, it's all recurring revenue, even though it's fewer clients." Hernandez touts the fact that OSI offers the same system, whether it's a mid-size CU or multi-billion dollar bank. He said because it's one system any investment in the system benefits all clients. While a CU may not use the system's business services functionality today, tomorrow it may. "Our system was built from scratch in the late `90s. It's one of the reasons we think we're the premier system. Every other vendor in the credit union industry has a system that wasn't home grown," said Hernandez. He touts the Oracle relational database and says OSI only has to update one system. He said the latest Oracle 10G release will be incorporated into its core, so all clients get the power of 10G. "Our little credit union clients have the same capacity as some of the largest institutions in the world." Gary Norcross, president of Fidelity's Integrated Financial Solutions division, doesn't think any one system can do it all. "When Fidelity looks at the marketplace we don't think one product can meet the entire spectrum. It's hard for me to believe that a $20 billion bank can run the same system as a de novo bank or a $3 billion credit union the same as a small credit union that may only be open for a very select few hours during the week," said Norcross. Fidelity is one of the major players affecting CU data processing and it came on the scene in a big way via acquisition. Its major deal was buying Aurum Technology, which had just bought Computer Consultants. Norcross, said unlike OSI, Fidelity doesn't want overlap when it buys companies. "Aurum is a great example. It got us into the credit union business, and allowed us to break in on a national scale on the item processing and payment services business," said Norcross. Norcross said Fidelity also subscribes to the belief that financials are going to want to do business with fewer vendors, which over the years in the CU space hasn't been the case as many have multiple third-party relations. "Back when I started it was honestly very typical where we sold one product to a customer at a time. Now product penetration at contract time is in the neighborhood of 10-15 per customer," he said. He thinks Fidelity has an edge because of all of its ancillary products, and it just acquired Certegy, which makes it a player in the credit union card business. OSI has raised the eyebrows of its competitors for its post-acquisition strategy, which is getting institutions to convert credit unions onto their system, rather than have them stay on the acquired system such as Fiserv almost always does. That won't be as prevalent in this deal because 60 of the acquired 220 clients are already on OSI via BISYS, and OSI plans to support BISYS' Total Plus mainframe product for now. Critics of OSI's "acquire-then-convert" strategy say the problem is by steering financials to convert systems, those financials look around at other systems as long as they have to convert anyway. "It's always risky when you tell a customer you have to convert. When you come in and say welcome to the family and you're going to have to convert, some are not going to receive that message well," said Jack Prim, CEO of Jack Henry & Associates, which is the parent firm of credit union data processor Symitar Systems. Prim recounted how he came to Jack Henry via a merger, and Jack Henry decided to support the acquired system for eight years. He said even after eight years of supporting it, when Jack Henry decided not to any more, some clients were upset. Prim said while Jack Henry doesn't subscribe to OSI's strategy, it may work for them. Hernandez likes to point out that OSI lost less than 5% of FiTech clients after steering them to conversion. Prim agrees that the CU industry DP space is clearly now dominated by four corporations. Each of these firms have a lot of resources, so they're strategies may be what set them apart. At Jack Henry the strategy is to have a clear defined core product for each niche, with add-on products that can be sold not only to Jack Henry core clients, but competitors as well. Prim said Jack Henry has purposely stayed out of some of the recent DP acquisitions such as BISYS. "Those core additions in our view would make for a cloudy story to what we believe is a very clear and focused strategy. We market more than one product, but we market to clearly-defined niches. We have a clear message we take to the market," he said. In the CU space, its product for mid- to large-sized CUs is its Episys system from Symitar. "We think our clear message is why in the credit union space we're seeing more new core business than all our competitors combined," he said. Beyond the core, Jack Henry then looks for add-ons. This is where the company has decided to make acquisitions of small firms, that sometimes have just one product. It purchased Yellow Hammer for fraud products, Verinex for biometric solutions, and TWS for imaging, to name a few. He noted Verinex was a future strategic play because once CUs begin using biometrics for not employee authentication, but member authentication, Jack Henry will be ready. He said Jack Henry likes to get into CUs with these products because it builds business, but also puts them in a better position if the CU does a core conversion down the road. "We'll sell outside our core base to Fiserv core clients, Fidelity core clients in a way that is non-invasive and non-threatening," said Prim. So what does Fiserv, the granddaddy of all acquirers think of recent consolidation? "I don't think it's going to abate. Fiserv is still very much in the acquisition game, and we're still selective in what we buy. It has to fit our criteria, you won't see that discipline changing," said Fiserv COO Norm Balthasar, Balthasar did not want to comment on the price OSI paid for the BISYS unit, but did say paying too much to buy market share generally puts pressure on the acquiring company. "If you pay too much there's a stronger push to integrate to get synergies. If the price isn't right for the property, we're going to move on. If you're too aggressive you harm the business and put the business in play," said Balthasar. Balthasar said don't be surprised to see some of the major firms join forces, though he wasn't speculating on any particular deal. He also threw Metavante in the mix as a major player against Fiserv on the banking side. Critics of Fiserv's "acquire and leave alone" strategy say it's expensive to keep so many systems running. Balthasar said variety is good for the market. Fiserv now has seven credit union data processing subsidiaries. "One size does not fit all. There are different types of organizations and institutions out there. They all have varied business needs. Variety of products serves the market best," he said. Fiserv can also make money on conversions from one of its subsidiaries to another. [email protected]