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BISYS Taps Bear to Explore Alternatives

BISYS' recent announcement that it has hired Bear Stearns to explore "strategic alternatives" has fueled much speculation that it is up for sale and plans to sell the company in pieces.

BISYS, headquartered in Roseland, N.J., provides an array of outsourced services to the investment management and insurance industries and is the parent company of research and consulting firm Financial Research Corp. of Boston.

BISYS executives declined to discuss the specifics of Bear Stearns' engagement and whether the firm will be officially put on the auction block or will consider other options to maximize shareholder value. "The board intends to pursue the path that best serves the company's shareholders," said spokeswoman Amy Conti.

But industry analysts believe the firm will inevitably split off its investment services division from its insurance services division and sell those business units to separate buyers, either to competitors or private equity investors.

BISYS' investment services division provides accounting, administrative and back-office services to more than 80 domestic and offshore fund clients with a collective 1,200 registered and non-registered funds with $400 billion in assets. Its alternative services sub-unit provides services to some 1,600 hedge funds and 300 private equity funds. This unit also provides recordkeeping services for the retirement plans of 19,000 companies with 1.6 million eligible employees and provides turnkey back-office services for more than 4,000 owner-only individual 401(k) plans.

Its insurance services division's services include the distribution of life, commercial property and casualty insurance for 75 insurance companies through 3,000 retail brokers and agents.

The hottest commodity right now that competitors are closely eyeing is BISYS' alternative investments servicing business, industry executives said. BISYS entered the business in 2002 with its purchase of Hemisphere Cos. and solidified its commitment to alternative investments servicing with its 2005 acquisition of RK Consulting.

Its well-known FRC unit, which BISYS acquired when it purchased Boston Institutional Group in April 2001, may be ready to go private once again, said Neil Bathon, who founded the company in 1987 and now works as an independent consultant. "It's no secret I have always wanted FRC as an independent entity," he said. This strategic review might prove to be just the right time to act, he added.

The possible sale of BISYS may take some time, predicted David Koning, senior research analyst at Robert W. Baird in Milwaukee, because he believes there will be two or more buyers.

The potential sale of the firm comes at a time when BISYS is still grappling with a series of multi-year financial restatements that date back to 2001. This past June it announced yet another accounting misstep regarding past acquisitions and another financial restatement. It has faced significantly delayed regulatory financial reporting and the threat of a stock exchange delisting. The company is also wading through a flurry of now-consolidated lawsuits filed on behalf of corporate stockholders charging that the firm, several executives and its public auditor violated securities law by making false and misleading statements about the financial condition of the firm related to the restatements.

BISYS also faces two regulatory investigations. The Securities and Exchange Commission has been investigating the firm's financial restatements and flaws in its systems of controls, for which Bisys has outlined remedial actions being undertaken.

And the SEC has also been investigating contractual "fund support arrangements" between BISYS and as many as 27 fund groups dating back to 2002. Under the arrangements, certain mutual funds used a portion of the administrative fees they paid to BISYS to pay for marketing, distribution and other fund expenses. Those arrangements, all terminated by December 2003, raised regulatory ire (see MME 5/25/05).

BISYS officials confirmed they have offered a proposed settlement to the SEC on the support payments issue. If accepted, the proposed settlement will total $21.1 million, which includes an estimated $9.7 million disgorgement, a $10 million fine and prejudgment interest of $1.4 million. Including legal fees, BISYS estimates it will spend $25 million to fully settle the matter.

BISYS also simultaneously announced that CEO Russell P. Fradin will be leaving the firm on Sept. 5 to become CEO of Hewitt Associates of Lincolnshire, Ill. (see Executive Moves, page 3). Robert Casale, BISYS' chairman of the board since 2004 and a company director since 1997, will become interim CEO until a successor is named.

In an Aug. 15 conference call with securities analysts, Fradin assured that he hadn't been fired and that his leaving was not a precursor to more bad news for the company. "The offer I received to serve as Hewitt Associates CEO was very attractive," he said, noting that Hewitt has only had three previous CEOs. "We are not aware of any impending bad news that has not already been disclosed," he added.

As for the hiring of Bear Stearns, Fradin noted that in considering future capital for the company, the firm decided to seek ways to realize shareholder value. "We are looking intensely at what the appropriate capital structure should be," he said.

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