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Fundtech ‘Sexy’ Business to Overcome S1 Hurdle: Israel Overnight

Aug. 21 (Bloomberg) -- Fundtech Ltd. Chief Executive Officer Reuven Ben Menachem said his company can thrive even if a planned sale to S1 Corp. falls through as banks’ focus on earning fees from transactions boosts demand for its software.

Concern that S1 will scrap its $700 million deal to buy Herzliya, Israel-based Fundtech has pushed the company’s American depositary receipts to the lowest level in nine months. ACI Worldwide Inc., based in New York, proposed buying Norcross, Georgia-based S1 for $9.50 a share on July 26, casting doubt on S1’s plans to buy Fundtech, announced a month earlier.

Fundtech will benefit from selling software to banks seeking to bolster fees on electronic payments, transfers and other transactions as lending becomes less profitable, Ben Menachem said in an interview. Deutsche Bank AG, Germany’s largest bank and a Fundtech customer, said April 28 that transaction banking pretax first-quarter profit more than doubled to 257 million euros ($370 million) in the quarter, helped by the acquisition of the ABN Amro units.

“Transaction banking has become a very sexy, profitable business as fee-for-services is more attractive than lending,” Ben Menachem, 50, said by telephone from Herzliya. “We’ve done very well as a standalone company and we’ll continue to do very well” even if S1 shareholders reject the proposal to acquire Fundtech at a meeting on Sept. 22, he said.

The 27 member-states of the Basel Committee on Banking Supervision, aiming to fortify the global financial system, will require banks to bolster capital and reduce reliance on borrowing, under its Basel III policy.

Israeli Air Force

“With the changes that have happened over the last three years in the banking world, and with Basel III, lending money is more difficult,” he said. “Even through difficult times, the cash management business has maintained its growth.”

After gaining experience from operating communications networks for the Israeli Air Force, Ben Menachem developed software for banks’ payment systems and founded Fundtech in 1993. The company, whose clients also include HSBC Plc and Bank of America Corp., first sold shares on the Nasdaq Stock Market five years later.

Israel, whose population of 7.7 million is similar to Switzerland’s, has 57 companies traded on the Nasdaq, the most of any country outside the U.S. after China. It is also home to the largest number of startup companies per capita in the world.

Israeli technology companies raised $569 million in capital during the second quarter of 2011, the most in two years and up from $343 million in the same period last year, according to the Israel Venture Capital-KPMG Quarterly Survey released July 13.

U.S. Index

Israel’s stock market was upgraded to developed market status by MSCI Inc. in May 2010, the same month the 63-year-old country was accepted to the Organization for Economic Cooperation and Development.

The Bloomberg Israel-US 25 Index of the largest Israeli companies traded in New York fell 1.1 percent to 81.23 on Aug. 19, extending its weekly loss to 4.3 percent.

Israel’s TA-25 Index gained 1.3 percent at the 4:30 p.m. close in Tel Aviv, trimming the slump for the year to 19 percent. The Bloomberg Israel-US 25 Index is down 22 percent in 2011.

Ben Menachem said he was “surprised” by ACI’s offer to buy S1, whose board instructed shareholders to disregard ACI’s proposal and vote for the purchase of Fundtech, according to an e-mailed statement on Aug. 11.

“The combination with Fundtech will establish a strong platform to accelerate revenue growth, increase earnings and generate significant value for stockholders,” S1 said in the statement.

Pending Acquisition

S1 shares jumped 30 percent to $9.26 on July 26 following ACI’s announcement, the biggest increase in 11 years.

S1’s acquisition of Fundtech would help the company access new markets in Africa and South America, Ben Menachem said.

Fundtech shares have dropped 21 percent since ACI proposed to purchase S1, pushing the company’s valuation to 13.9 times estimated earnings, in line with the Nasdaq Composite Index, according to data compiled by Bloomberg.

Fundtech retreated 2.1 percent to $15.08 in New York on Aug. 19. The shares lost 0.7 percent to 55.13 shekels, or the equivalent of $15.42, in Israel today.

The company, 59 percent owned by Israeli billionaire Nochi Dankner’s Clal Industries and Investments Ltd., said on Aug. 3 that second-quarter revenue rose 16 percent to $40.5 million.

Fundtech expects annual earnings to rise in 2011 to a range of $1.03 to $1.13 per share, from 79 cents last year, it said.

The shekel weakened 0.5 percent to 3.5760 per U.S. dollar on Aug. 19. The currency has lost 1.2 percent last week, the worst performer among 10 emerging markets in Europe, Middle East and Africa tracked by Bloomberg.

Israel said on Aug. 19 that its military attacked weapons factories and smuggling tunnels in the Hamas-controlled Gaza Strip after rockets struck its south. The day before, attacks outside the resort city of Eilat killed eight soldiers and civilians.

To contact the reporter on this story: Tal Barak Harif in New York at tbarak@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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