GLASTONBURY, Conn. — Some private firms spend years positioning themselves to go public. Open Solutions, Inc. has been there, done that and is now reversing course. Open Solutions went public back in November of 2003. It appeared to be a terrific move for the firm as not only did its stock price surge from its initial $17 offering, it used the capital infusion to make a number of strategic acquisitions. But last week Open Solutions announced that it is returning to a private company structure. It is being purchased by private equity firms The Carlyle Group and Providence Equity Partners for $1.3 billion. Leadership cited a desire to move away from the stringent reporting requirements of a public company and to make R&D decisions based on long-term objectives, not how they might negatively affect the latest earnings report. In essence, said Open Solutions Chairman and CEO Louis Hernandez, the company wants to keep its entrepreneurial spirit and do what's best for clients. “We get the benefit of no longer having to worry about quarterly results. We can focus on long-term investment with investors who have very deep pockets and are interested in Open Solutions becoming a standard in the world,” said Hernandez.

Hernandez said the company has doubled its business since going public and its new contracts are up 55% in the most recent quarter. Its revenues have risen dramatically since 1999 when Hernandez came aboard. At that time, its revenues were roughly $160 million a year and today they are close to $450 million.

Shareholders will profit nicely from the deal. They will receive $38 per share, representing more than a 30% return over the average share price in the last 30 days of trading.

The technology provider, known best in the credit union space for its core system offering, has made its mark with very large credit unions. It has 635 core credit union clients, including 10 of the top 50, according to Callahan & Associates. In total, 2,200 credit unions are using other complementary products such as item processing, Internet banking, etc. It touts not only its open system philosophy, but its relational database as the system of the future and superior to the many legacy systems in the credit union industry.

“We're highly relational with immediate information on the person, and we can do commercial institutions. We're highly normalized. It never mattered to us what type of institution we served,” said Hernandez, who touts the fact that Open Solutions' core system was built from scratch in the late '90s, unlike many legacy systems.

Hernandez believes the credit union industry has some of the oldest technology of any industry at the core system level, and that it's costing credit unions money. “It's time to move away from adding middleware and teller systems to extend the life and mask the weaknesses for these older technologies. It is time to flush that out and move to newer systems that are more flexible.”

So why aren't all credit unions moving away from legacy systems? “Regulators disincent you from taking risk at the core, and it's the most expensive and complicated software you will have in your institution.”

He believes credit unions are waking up to the need to upgrade the core. “The competitive landscape has intensified enough that it is causing boards and CEOs to think differently and maybe move away from this layered on approach that is masking weaknesses.”

One of the hallmarks of Open Solutions' public company life was acquisitions (see sidebar), including buying credit union data processor RDS and a unit of BISYS for $470 million. Hernandez said it will continue to look for acquisitions as a private firm. Its acquisition philosophy on the core side is to migrate the existing core clients to the Open Solutions system.

This contrasts with Fiserv's acquisition style, which is to acquire firms and keep systems in place. Fiserv currently has seven credit union data processing subsidiaries. Tom Neil, who heads up the credit union data processing division for Fiserv, said Open Solutions continues to be a tough competitor in the marketplace, but its acquisition strategy has caused some churn.

“They are a really good competitor for us. They are a tough player, and more so in the credit union space. Certainly they have had some great wins on the high-end. The flip side of that is they've created a lot of churn in the market with all of their acquisitions. Their model clearly is different from ours, buying companies and smashing them together,” said Neil. He cited the signing away of Digital FCU, which was an RDS client prior to the Open Solutions acquisition.

Hernandez has a different take on Fiserv's acquire and leave alone strategy. “Fiserv is a great company. What I would say is obviously our model is quite different. If I were stuck with seven old legacy systems and wanted to limit churn, naturally I would say it is their best option.” According to Bud Watts, managing director of the Carlysle Group and who led the Open Solutions acquisition, there were four things that attracted his firm to the deal: a strong management team, best-in-class technology, the credit union and small to mid-size bank customer base, and the clients are highly regulated with high integrity who pay their bills. “This is absolutely a growth investment for us,” said Watts. He sees growth coming from increased penetration in credit union and banking markets and by investing in more ancillary products to build around the core. Watts said it's not uncommon for a company the size of Open Solutions to return to a private structure. “The limits that this company and others like them find today as a public company is they have to go and convince potentially hundreds of people an investment is a good idea, instead of just two (with us),” said Watts. He said the company also faces investor backlash even if it makes a good investment in new technology if investors think it's too costly. Watts said acquisitions will continue to be a part of Open Solutions' strategy. The ultimate goal is to bring Open Solutions public once again, but as a much larger company better able to handle the requirements placed on public firms. “With more resources, a larger market capitalization, and more outstanding shares, statistics start to become your friend,” said Watts.

–pgentile@cutimes.com

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Open Solutions Going Back to Private Structure in $1.3 Billion Deal

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