Metavante: Life after tech bubble
M&I's tech unit loses shine, finds acquisitions
Michael Muckian
Two years ago, some financial analysts said Metavante Corp. was the only bright spot in the Marshall & Ilsley Corp. story, and Metavante was on the brink of spinning off into its own publicly traded company.
Due to a softening economy and dramatic downturn in many tech stocks, Metavante's star has dimmed. In fact, some analysts think Metavante may be holding down M&I's stock price.
However, other analysts say Metavante still adds value to its parent firm despite a recent earnings slowdown.
"Would M&I be better off without Metavante? Not necessarily," said David Long, an analyst with Robert W. Baird & Co. Inc.'s Chicago office.
For its part, M&I management says it has no plan to dispose of its Brown Deer-based provider of electronic financial transaction support and e-banking services. M&I chief financial officer Mark Furlong is upbeat about the technology company's future.
"Our advantage is having Metavante as a wholly owned part of us, and we consider it a real benefit for M&I," Furlong said.
Metavante provides services to the $30 billion-asset Milwaukee-based M&I Bank and its branches. Metavante also serves 5,100 other financial services clients in 48 states and 14 foreign countries. Customers include the nation's top 20 banks.
Metavante's link to the parent company, as well as its extensive client list, gave it what Furlong describes as a "disproportionate contribution to M&I's market cap."
Metavante's contribution totaled no more than 8 to 10 percent of M&I's operating income two years ago, yet some analysts estimated Metavante's increased M&I's market capitalization value by as much as 18 percent, Furlong said.
IPO aborted
Marshall & Ilsley seriously considered selling Metavante shares in 2000. The initial public offering would have offered 16.9 percent of Metavante stock, with the remaining 84.1 percent initially being held by M&I.
On Nov. 1, 2000 — right before the stock was ready for release — M&I management decided to cancel the IPO due to "adverse economic conditions," said spokesman Chip Swearngan.
Technology stocks had just begun their fall from grace, and the adverse conditions cited by Swearngan were caused by a serious decline in the demand for technology outsourcing services, said Rosalind Looby, a director and senior analyst with Credit Suisse First Boston, New York.
"They could have gone public, but their stock would have cratered," she said.
Today, Metavante may not match the bank's financial performance level, and its financial performance isn't what it was in the 1990s, but there's more value to the technology company's relationship than its bottom-line results, say analysts.
"Metavante complements M&I's business and allows the company to generate more business with other banks," said Baird's Long. "Other banks may operate with a higher efficiency ratio than M&I because of Metavante, but that doesn't mean they're better off."
Metavante's growth rate had averaged 25 percent per year from 1991 to 1996, faster than the bank's growth of 5 percent for that same period. Metavante's growth slowed to 13 percent from 1997 to 2001, compared to bank growth of 10 percent. The difference was noticeable, both inside and outside the corporation.
The slowdown in growth, Furlong explained, occurred because Metavante's client banks were merging, thus reducing the size of the company's market.
In preparation for Y2K, existing clients shied away from changes to their data processing, a core Metavante service. As the economy worsened, banks refocused on revenue strategies, leaving the back-office development in which the company specializes for another time.
The slowdown caught the attention of some industry analysts, who feared Metavante's role as part of M&I's larger entity might be part of the cause.
"Metavante has taken some knocks. There's not an extraordinarily high level of understanding what the company is or does," said Looby of Credit Suisse First Boston.
She also noted its M&I affiliation gives it a lower profile than its stand-alone competitors, such as Fiserv Inc., Brookfield.
But as the industry's largest bank-owned technology provider, Metavante still offers advantages its competitors can't necessarily offer, including its connection to M&I's banking entity, said Mike Hayford, chief financial officer.
The technology provider offers diversity in M&I's business profile and complements the bank's core business, said Long. Metavante also earns revenue from providing services to other banks, an income stream most financial corporations lack, he said.
Metavante's third-quarter 2002 revenue of $153.9 million comprises 28.6 percent of M&I's total revenue of $538 million for the period. For the same period in 2001, Metavante posted revenue of $144.4 million, or 30 percent of M&I's $474 million.
However, Metavante's $14 million income is just 11.7 percent of the bank company's total $119.2 million.
The technology firm's inherently higher operating expenses, compared to those of the bank, are one of the culprits, said Long.
In 2001, Metavante earned $14 million in operating income, or 16 percent of M&I's total of $83.3 million. The company employs 4,000 people throughout North America, including 2,700 in the metro Milwaukee area.
'Organic' growth
Metavante continues to grow its business "organically," meaning continued emphasis on increasing the number of customers and their level of involvement while still searching for acquisition candidates, said Hayford.
In July, Metavante acquired Paytrust Inc., Lawrenceville, N.J., and in August, it acquired Spectrum EBP, Atlanta. Company officials would not disclose the purchase prices. Both firms provide electronic bill payment services, an area in which Metavante currently ranks second behind Atlanta-based CheckFree, which holds 70 percent of the electronic bill pay market. Metavante controls 20 percent, said Hayford.
Metavante has also increased its services to other banks, said Hayford.
In October, Harris Bank, Chicago, began piloting Metavante's EFT Data Mart, an online tool enabling the bank to retrieve and analyze ATM and debit card information. In November, Metavante signed an agreement to provide commercial e-bank services to $78.2 billion BB&T Corp., Winston-Salem, N.C., the nation's 14th-largest financial holding company.
M&I Bank remains Metavante's largest customer, Hayford said.
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