DH Corp., a 140-year-old company best known for printing checks, is wooing investors with its transformation into a deal-hungry financial-technology provider.
The chief executive officer of Toronto-based DH said he’s looking for more purchases after announcing the $1.25 billion buyout of payment-technology company Fundtech Ltd. in April, the company’s biggest transaction yet.
“You will see us continue to grow organically and through acquisitions,” Gerrard Schmid, 47, said in a July 10 phone interview. “We’re clearly focused on absorbing the Fundtech acquisition and to date it’s going well, but I wouldn’t say that our journey’s done.”
Venture capitalists, private equity firms and other investors are stepping up investment in financial-technology companies. The industry invested $3.1 billion in fintech startups in the fourth quarter of 2014, up 138 percent from the same quarter in 2013, according to Silicon Valley Bank, a high-tech commercial bank.
At the same time, established financial institutions are pouring money into technology as companies from Apple Inc. to Borrowell Inc., a Toronto-based peer-to-peer lender, challenge their traditional borrowing and payment businesses.
Banks will invest $196.7 billion globally in technology in 2015, up 4.6 percent from last year, according to Celent, a Boston-based research firm. That will grow to $215.5 billion by 2017, according to Celent.
Amid the battle for market share, DH has zeroed in on improving banks’ back-end systems for tasks like processing mortgage applications, helping institutions keep track of how people use ATMs and handling different types of payments.
“Some of these technologies that are not close to the consumer are very, very difficult to displace and therefore those are technologies that we generally find attractive,” Schmid said. “So that’s one lens that we use as we think about our acquisitions.”
Investors are on board with DH’s strategy. The stock has surged 139 percent in the past five years, compared with a 25 percent gain in the broad Standard & Poor’s/TSX Composite Index and 39 percent rise in the gauge’s commercial banks index.
DH rose 0.3 percent to C$41.45 in Toronto at 4 p.m., giving it a market value of C$4.38 billion ($3.38 billion). Analysts have five buys, four holds and no sell recommendations on the stock, according to data compiled by Bloomberg.
The company is able to use its check-printing business as a “cash cow” to fund acquisitions, said John Kim, a fund manager at Aston Hill Financial Inc. in Toronto.
“They’ve done a super job of taking a staid old company in a declining market and taking that money and really reinventing their company into something very different,” he said.
Founded in 1875, DH began acquiring tech companies in 2005 with loan processing firm Advanced Validation Systems LP. The check business still accounts for almost a quarter of revenue, though that’s expected to shrink through 2015, the company said in its first-quarter earnings report released on April 28.
“As long as people believe that they can keep making accretive acquisitions and they can actually integrate well, they will get a higher multiple,” said Aston Hill’s Kim, who’s held the stock on and off for 10 years. His firm manages about C$4 billion, including shares of DH.
DH’s price-earnings ratio is 25 compared with 12 for the commercial banks index.
The industry is starting to get more crowded. In addition to startups, DH faces competition from U.S. giants including Fiserv Inc. and Fidelity National Information Services Inc., said Paul Condra, an analyst at BMO Capital Markets in New York.
“There is much more competition in the market than ever before so we’re always aware of the competitive landscape,” DH CEO Schmid said. Still there’s lot’s of money to go around.
“Global spend on technology from banks, it’s about $200 billion,” he said. “It’s a very sizable pie to be pursuing.”