Intuit's Billion-Dollar Banking Bet

With its $1.35 billion deal for Digital Insight, the maker of Quicken finance software sees a fresh new market opportunity in online banking

Intuit (INTU) has what some might consider an antique among technology companies. Its first product, Quicken software, is now at the ripe old age of 22 but still shows signs of remarkable vigor in terms of robust sales and user figures. Intuit Chief Executive Steve Bennett hopes he's found another lasting strategy—serving up financial software for online banking customers.

The Mountain View (Calif.) company said Nov. 30 that it's paying about $1.35 billion for online banking services provider Digital Insight (DGIN), based in Calabasas, Calif. The deal, expected to close in the first quarter of 2007, will bring Digital Insight's operations into Intuit as a new financial institutions business unit. Digital Insight CEO Jeff Stiefler will become its president.

"We're excited," Bennett said. "This gives us the opportunity to come up with the next generation of online functionality for businesses and consumers."

Online Play

Bennett and Stiefler hope to collaborate by adding software to the online banking services Digital Insights already provides to more than 1,760 financial institutions. Those firms, in turn, have more than 38 million consumer and business account holders. Intuit, meanwhile, has 15 million Quicken users, more than 20 million tax returns completed using its TurboTax software, and 7 million small-business clients.

Intuit already did something similar with its QuickBooks products, which are targeted to the small-business market. Early on, Intuit had sold QuickBooks to accountants, who then advised their small-business owner clients to use it as well.

During an analyst presentation day in September, Intuit highlighted a survey revealing that many consumers and small businesses prefer using Internet banking as a means of tracking their finances, giving this online alternative a higher ranking than Intuit's solutions, according to Irina Logovinsky, an analyst at Morningstar (MORN). "Intuit will be able to sell more or at least introduce their products to this new customer base," because of its Digital Insight deal, she says.

Boosting Growth?

Meanwhile, Intuit will be acquiring a smaller company in a relatively new industry. Intuit's revenue grew 14.9%, to $2.3 billion, during the 12 months ending July, 2006. Digital Insight saw its revenues grow 11.2%, to around $238 million, over the past year.

"Overall, I think the deal is positive," Standard & Poor's analyst Jim Yin said in a research note. (S&P, like, is owned by The McGraw-Hill Companies (MHP).) He pointed out that Intuit's growth rate has been decelerating in recent years, which he thinks is cause for concern. "[Intuit] obviously would like to increase their growth rate."

Bennett thought the deal was worth paying 5.5 times Digital Insight's estimated 2006 sales. He agreed on $39 per share in cash for each Digital Insight common share and plans to finance the deal with cash and up to $1 billion of debt.

Buying In

Digital Insight shares surged 15.6% Nov. 30 on news of the deal, settling at $38.15 on the Nasdaq. Intuit's stock fell 1.2%, to close at $31.52 per share. Investors have taken profits recently in the stock, which had been at a 52-week low of $23.99 per share in March.

Digital Insight will keep its facilities in California and Georgia. Its shares will no longer trade.

Intuit expects the deal to dilute earnings by 2 cents to 3 cents per share in its current fiscal year, but earnings will then grow slightly in fiscal 2008. Before the announcement, the mean analyst estimate for Intuit's earnings per share had been $1.40 per share this year and $1.59 in 2007, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial (TOC).

"Online banking is growing rapidly, but today's solutions don't meet the needs of most small businesses and many consumers," Stiefler said in a press release. "Digital Insight's and Intuit's combined assets and competencies will change the game for small businesses, consumers, and the financial institutions that serve them."

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