Online Banking Boom

"If price were no object, DI would be one of my favorite companies in the public markets."

So said I seven months ago, a remark made in passing whilst previewingDigital Insight's (Nasdaq: DGIN  ) Q1 2006 earnings reports.

So repeated I three months later, after surveying the online banking bust that hit the nation's online banking software makers in the wake of a temporary slowdown in bill payment adoption (a bust that reduced DI's valuation to a very tempting $25 per share, I might add).

So acted I not upon those words.

So acted Intuit (Nasdaq: INTU  ) decisively yesterday, offering to buy the firm for $1.35 billion.

So many regrets.

Spilled milk, and tearful goodbyes
So it's with a heavy heart that I bid farewell to DI as it leaves the public markets for the warm embraces of Intuit, a firm that, after being recommended by Motley Fool Inside Value, returned a tasty 87% profit in less than two years. But life goes on, and -- good news, Fools! -- there's still a fair number of companies in this industry to choose from. However, we may have to act fast if we want to own them, because the way things are going, they may not be around much longer. DI's may be the splashiest deal in this space, but it's not the first. Back in October, Open Solutions (Nasdaq: OPEN  ) sold itself to a private equity shop.

And then there were four
What's left to us may not be the best of the industry, but in this Fool's opinion, we're not down to the dregs just yet. With DI and Open out of the picture, we still have a good four companies to choose from if we want to own a piece of the global trend towards digitization of our savings and payments systems. From biggest to smallest, they are:

  • Online Resources (Nasdaq: ORCC  )
  • S1 (Nasdaq: SONE  )
  • Corillian (Nasdaq: CORI  )
  • Sybase (NYSE: SY  ) (Actually, Sybase is the largest of these by far. But its online banking arm, known as "Financial Fusion," is so tiny that the firm doesn't even break out its results anymore.)

Want to own one while you still can? Well, before jumping in, let's test the valuation waters. After all, a "big news" event like DI's acquisition is likely to set off some ripples in this space, and may have already skewed the valuation of one of these companies out of whack. No sooner had Intuit's purchase been announced than DI archrival Online Resources saw its own stock leap 5% on suspicions that it, too, might not be long for the public markets. With that caveat in mind, here's how things stand today:

Enterprise Value ($millions)

Free Cash Flow ($millions)

Projected Growth Rate (%)

EV/ FCF/G

Digital Insight

981

49.8

20

1.0

Online Resources

319

5.1

25

2.5

S1

244

(13.9)

8.5

negative

Corillian

132

(3.1)

20

negative

Sybase

1700

184.9

11.5

0.8

Enterprise values and growth rates taken from Yahoo! Finance. FCF data provided by Capital IQ, a division of Standard & Poor's, and based on trailing-12-months results.

Caveat
Sybase is by far the largest company swimming in the online banking pool. But that's actually overstating the case, because from the little information it releases on its Financial Fusion online banking unit, it seems Sybase has at best dipped a toe into this pool. Most of the business remains devoted to databases, RFID technologies, and similar very high-tech, very cool stuff -- that has almost nothing to do with online banking.

Which is my roundabout way of saying that Sybase is only technically a player here. Be aware that Sybase's numbers, shown above, don't have much at all to do with its online banking operations per se. Also be aware that, the last time the company truly broke down its business to show how Financial Fusion was performing, it was running at a loss. That disclaimer out of the way, let's look at the other three players and how they compare to DI.

On with the show
S1 has reported GAAP profits for the last 12 months, but only by way of selling itself for parts; from a free cash flow perspective, it's still unprofitable. Corillian generates neither GAAP nor cash profits. Online Resources, in contrast, is profitable both from a free cash flow and a GAAP perspective. It's in the midst of absorbing its recent acquisition, Princeton eCom, and I expect that has something to do with the firm's inability to generate a lot of cash right now. That caveat aside, I must say the valuation doesn't look too tempting right now. Maybe once it's done digesting.

Honestly, after surveying the field today, I think Intuit chose the best of the bunch here. As independent online banking software players go, DI was not just the most profitable; it was also tied for second-fastest grower, and had the lowest valuation of the bunch (at least as measured by that last column). As for those firms that remain, I admit to being less than excited about any of them -- even the one that I own.

Looking for buyout trends to exploit? Check out the origin of this one in Tom Taulli's Open Solutions Is Going Dot-Com.

Intuit madeInside Valuesubscribers very happy. Which other stocks are similarly delightful? Take a free 30-day trial of the service and find out.

Fool contributorRich Smithowns shares of Corillian. The Motley Fool stores its disclosure rules in an iron vault in an undisclosed location. (No, not really. You can read them right here.)


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