MOUNDS VIEW, Minn. and MADISON, Wis. – Consolidation continues to tear through the credit union marketplace, this time in the Internet arena with a merger of CUNA Network Services and Liberty Internet Services. The two companies announced that they would be merging operations with Liberty becoming the majority and controlling shareholder. The firms essentially did a valuation of each other's stock and engaged in a stock-exchange with Liberty coming out the majority stockholder. As such it will control five of the seven board seats of the new firm. The firm will be renamed. For now it is legally held under the name Cavion Network Services, but that will likely change. This is the second major tech-related deal for Liberty in just a few months. It recently sold off its Liberty FiTECH data processing division to DP vendor Open Solutions Inc. This time Liberty is increasing its presence in an area it has already shown success – the Internet. Two years ago Liberty acquired the financially-troubled Net banking firm Cavion Technologies and has completely turned it around. It went from losing money and having 60 clients to today turning a profit with some 230 credit union clients. In addition, Liberty provides Web hosting for some 600 credit unions, and offers online check imaging, online statements (via partnership with Reed Data), and some online loan decisioning. A big part of the company's online success can be traced to Michael Provenzano, who serves as Liberty EVP and President of Liberty Internet Services. Provenzano believes there are still gains to be made in the Internet arena. He says the key is to focus. "We brought a lot of focus to Cavion. We've been more methodical in product development than many of the dot.coms were in their hey day. We're cautious and responsible in our research and development efforts," said Provenzano, emphasizing that Liberty will not just go out and launch the latest online fad product for the sake of having it. CUNA Network Services has not been as product focused. It's bounced around from a number of offerings over the years. However CNS President/CEO John Hobko says CNS does know its niche, despite what it may look like to outsiders, and the niche certainly isn't online banking or bill pay. Though it offers those products it only has about six clients for online banking and 30 for bill pay. CNS' real niche is Web hosting and a variety of security services, ranging from virtual private networks and remote vulnerability testing to security policies and smart "chip" (not card) technology. It also has a unique compliance review arrangement for online services with RSM McGladrey. Money, Money, Money The problem for CNS, said Hobko was capital. It was always behind in raising money, and just never seemed to have enough. CUNA even took a new approach by partnering with other major players in the market, as opposed to going it alone as it has traditionally done with its for-profit arm. For example, EDS invested $750,000 giving it a 5% share in the company. EDS was also named a strategic partner for online services. EDS' investment looks even stranger now as it has sold off its CU unit to Fiserv. That investment now moves to Fiserv. Other CNS investors include smart card firm SchlumbergerSema, which invested $400,000; TravelExpress ($300,000); the California CU League ($250,000); and the Colorado CU League ($50,000). All leagues actually have an ownership interest in CNS as CUNA Strategic Services Inc., (CUNA's for-profit arm), which is owned 51% by CUNA and 49% by the leagues, has a 28% stake in CNS. All these percentages change of course when this deal is done and leaders from both firms say some investors could drop out, but essentially it's up to the investors themselves. Just as recently as February CNS was seeking $3.5 million in additional capital. It even started selling shares to individuals. Juri Valdov, CNS Chairman and Northwest FCU President/CEO, bought the first unit for $26,000. CNS said it needed about $2 million to reach break even, which it was hoping to do by next year. "I felt good about our operating plan and net income. I'm disappointed that we did not meet the capital challenge that we faced. The market is what the market is. This was a tough time to raise capital in the U.S.," said Hobko. CNS was officially formed in July of 2001 by the combination of Sunstar IP Communications and the e-com assets of CSSI. Hobko came into the picture because Sunstar IP, based out of Tampa, was his company. Hobko said CNS has about 1,000 CU clients. However even Hobko admits that number is misleading in that about half of those are for its CarFax service, a product CNS picked up from CSSI and was not indicative of its high-tech push into security testing, VPNs, home banking, smart chip technology, etc. There's no grass growing under Liberty President/CEO Stan Hollen. Embarking on just his second year at Liberty, he's already made a few blockbuster deals and more could be coming. Hollen said this deal was about online girth and making Liberty an even larger Internet player. "There are fewer players today in the Internet area, an area that is a major focus for us. We're not backing away from it. We're a major market leader in Web hosting. This is a business we know," said Hollen. "They had some technology we are interested in downstream and people on board who will be of service." He noted that this deal will help Liberty compete more effectively with market leader Digital Insight. Provenzano said Liberty will cut duplication where necessary. There will be some decisions to be made. CNS has a data center in Tempe, Arizona, with an administrative office in Tampa, Fla., and some staffers in Madison. Some of the Madison employees have already been transferred out of CNS by CUNA. For example, Doug Benzine, who was often the spokesperson for CNS, is now in research and advisory services for CUNA. Liberty has a successful data center in Denver (from the Cavion acquisition) with administrative and creative support in Minneapolis. Make no mistake, said Provenzano, CNS' security products were a major reason for making the deal. "Their compliance reporting with McGladrey, VPN, and smart chip technology all are important for security. It's what made the merger attractive to us," he said. According to Hobko, it wasn't only financial capital that CNS was missing, also human capital. Staff was not able to keep up with a growing client base. For CUNA this is one of many for-profit endeavors it has exited. Often CUNA Mutual was the purveyor, but this time its Liberty. Past sell-offs include products such as data processing card products, investment products, mortgages and others. Provenzano has been named interim CEO of the new firm, yet Hollen said Liberty will go out and find a permanent CEO, likely not Provenzano, who already has a full plate. [email protected]