Calabasas-based Digital Insight Corp. on Monday agreed to buy rival NFront Inc. in a $439-million stock deal that would merge two of the leading Internet banking services companies. Analysts say the acquisition is a logical step in the consolidation of a relatively new industry.
NFront is focused on providing Internet services to smaller community banks around the nation. Digital Insight's services are focused on credit unions.
The acquisition helps money-losing Digital Insight remain the biggest provider of online financial services to local banks, with 645 clients who have about 16 million customers. Analysts expect about half of all U.S. adults to be using the Web for financial transactions by 2005, up from 5% now.
"Consolidation in this industry is inevitable," said Adam Holt, an analyst at Hambrecht & Quist. "This combines two of the best-positioned companies in this space to create the leader in the market."
Like Digital Insight, NFront lets customers of small and mid-size banks manage their finances, pay bills, transfer money and pay employees using the Web. It also designs and hosts Web sites.
The acquisition will let Digital Insight offer new services, such as enabling customers to apply for loans and insurance online, said Chairman and Chief Executive John Dorman. Tripp Rackley, Dorman's counterpart at NFront, will be president of the combined company, which will be based in Calabasas.
But the market reacted badly to the deal: Digital Insight plunged $10.19 to $39.94 on Nasdaq. NFront shares rose just $2.25 to $21.
Digital Insight said it will pay 0.579 share for each share of NFront, valuing the Norcross, Ga.-based company at $23.13 a share based on Monday's closing price for Digital Insight stock.
The shares of both companies have more than doubled since Digital Insight's Oct. 1 initial public offering and NFront's share sale in June.
The combined company will have about 230 workers and $30 million in annual sales. Digital Insight had a third-quarter loss of $2.2 million, while NFront had a $2.6-million loss in the quarter.
Matt Luckett, an analyst with SoundView Financial Group, said the merger is part of the maturation of the industry.
"This market is in its early stages, and from a mid-market perspective, to dominate you have to become big quick," Luckett said. "This makes them the dominant player in the space, and they have opportunity to scale quicker from here."
The Internet banking services industry has seen a rash of consolidation in recent months, with S1 Corp., formerly Security First Technologies, buying several complementary companies, including Edify Corp., FICS Group and VerticalOne Corp.
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Investors had a bad reaction Monday to Digital Insight's plans to acquire NFront, but the stock still is well above its initial offering price of $15. Weekly closes and latest:
Source: Bridge News