A Big Deal Under The Radar

One minute, eBay (EBAY ) is buying Internet phone service Skype. An hour after that, Wachovia (WB ) buys auto financier Westcorp. Oracle (ORCL ) takes out Siebel Systems (SEBL ) just 32 minutes later. All this came days before investors began drooling for details of a possible Microsoft (MSFT ) deal for part of Time Warner's (TWX ) America Online. It's deal ania, once again, and in every mania some things get neglected -- sometimes promising things. This time the $4.5 billion merger of Fidelity National Financial's (FNF ) information services unit into credit-card and check processor Certegy has been widely overlooked, despite being valued at more than the Skype, Westcorp, and Siebel deals. No wonder, perhaps, given each party's low profile. I mean, what mental picture does the term "Certegy" create? For its part, Fidelity National, with a $7.6 billion market capitalization, may be the single biggest anonymous company. It has nothing to do with Fidelity Investments, the closely held mutual fund behemoth of Boston, yet in its fields, it's every bit as dominant.

BASED IN JACKSONVILLE, FLA., Fidelity is the nation's No. 1 title insurer, writing about one in three real estate title policies. It also offers a raft of specialty insurance, such as home warranty lines, while running a rich collection of data processing, outsourcing, and software operations for the world's banks, real estate brokers, and other financial intermediaries. In the last four quarters, Fidelity netted $1 billion on $8.6 billion in revenue, up from $5.1 billion in 2002. Ronald Muhlenkamp, whose market-beating, $3 billion Muhlenkamp Fund (MUHLX ) holds nearly 2 million shares, has kept a big stake since 1991, with some shares at a cost of $1.50. Lately, they're going above 44, but he told me he has no plan to sell: "These folks have been great stewards of our assets."

Fidelity's stock swap with Certegy amounts to taking Fidelity's wholly owned information services unit public, without resorting to an initial public offering. Fidelity had been mulling an IPO, as it has been frustrated that investors haven't valued its diverse operations as highly as it believes they should. So, parallel to the Certegy deal, Fidelity also is moving to spin off to its own stockholders an 18% stake in the mainstay title insurance business. This new public company, to be called Fidelity National Title Group, is expecting to begin trading on the NYSE in October. Once the dust settles, stock in the parent, Fidelity National Financial, will keep trading, plus those of its two offspring, Fidelity National Information Services and FNTG.

So which might you want to own? Arguments can be made for each. As a consolidator of information-technology services, FNIS figures to be a faster grower, while FNTG may have a more entrenched business. Yet to me, neither is as attractive as the parent, for a simple reason. Fidelity National Chief Executive William Foley has been building up the company since 1984. That's where his biggest interest -- more than 8.8 million shares and options on shares -- lies. In allocating resources, costs, and benefits among the three entities, the parent is unlikely to suffer. Already, for example, in the title insurance group's spin-off, the parent is keeping a special class of supervoting shares for itself. But it is leaving the costs of the distribution with the child.

As one public company today, Fidelity National trades at a multiple of 12 times the Standard & Poor's (MHP ) estimate of 2005 earnings. But the sum of its three parts stands a good chance of rising noticeably.

By Robert Barker

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