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S1 takeover gets closer look from Justice Department

by William McConnell in Washington | Published November 3, 2011 at 11:43 AM

After months of trying to ward off an extended antitrust review of their proposed takeover of rival electronic payments servicer S1 Corp., officials of ACI Worldwide Inc. now must comply with a second request for information from the Department of Justice.

ACI and S1 announced a friendly $500 million deal on Oct. 3, roughly three months after ACI launched what began as a hostile takeover attempt. ACI had been attempting to win Justice Department clearance since July 27, when it filed its original premerger notification documents with U.S. antitrust regulators. Twice ACI had pulled and refiled its merger notification in hopes of heading off a more intrusive and expensive second request.

ACI announced the second request on Oct. 28 and said it is now "in the process of gathering information responsive to the request and intend[s] to continue to cooperate with the DOJ in an effort to obtain antitrust regulatory clearance for the proposed acquisition as expeditiously as possible."

In documents filed with the Securities and Exchange Commission, ACI officials insisted that the transaction would not "enable [ACI] to obtain market power in, or even a significant share of, any relevant market."

"The combination with S1 would provide ACI with enhanced scale, breadth and additional capabilities to compete more effectively in the highly competitive payment systems marketplace," they said, and "the combined company would continue to face intense competition from third-party software vendors, in-house solutions, processors, IT service organizations and credit card associations, including from companies which are substantially larger and have substantially greater market shares than the combined company."

The officials also insisted that entry into the electronic funds servicing market by new competitors is likely. "The dynamic worldwide nature of the industry means that competitive alternatives can and do regularly emerge."

Noting that the company withdrew and refiled its pre-merger notification in August and again in September, they conceded "there can be no assurance that the DOJ will concur with our belief."

ACI chief executive Phil Heasley outlined what he characterized as slight overlaps in product lines when the company launched its original hostile bid in July. "The acquisition of S1 would provide complementary products to ACI's already robust portfolio of payment solutions," he said during a conference call announcing the move.

Although the two companies both offer retail payment products, ACI focuses on serving larger financial institutions and S1 smaller ones. "Our two companies do not share much end-user customer overlap in the retail payment product family where ACI today derives two-thirds of its revenue," Heasley said. "The acquisition of S1 would provide breadth and additional capabilities to what ACI does today in several key areas. These include expanding our retailer business beyond North America, increasing our retail banking payments business down into the midtier financial institutions, and adding function and global reach to our online banking business offering, including new capabilities around branch banking and trade."

Despite ACI's insistence that there are few competitive concerns, Nancy Atkinson, an analyst with Aite Group LLC, said she's "not completely surprised" that the DOJ decided to take a closer look. "There's some overlap in what they offer," she said.

Although robust competition exists in the overall market for electronic payment providers, she said both companies have expanded their efforts to provide wholesale services for banks and cash management, including in trade finance facilitating cross-border transactions by providing letters of credit to buyers without requiring them to make up-front payments.

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