Fidelity National Financial (FNF) closed the $2.9 billion acquisition of Lender Processing Services Thursday within the timeline and expectations of analysts who cover the space.
On Friday, these same analysts suddenly found themselves with no LPS left to track — and began to ask themselves: "So now what?"
In the announcement, FNF chairman William Foley also cited "future complementary acquisition opportunities" in the mortgage technology business, as Fidelity National looks to expand its footprint in the wake of the LPS acquisition.
Brett Horn, an equity analyst at Morningstar, said while there are operational parallels at the now combined companies, it's on the tech side where LPS will provide the most value to Fidelity.
"The similarity of the two is mainly in the customer base. Both companies serve mortgage lenders. Fidelity will likely look to flesh out the data operations at LPS," Horn said.
LPS was a fun and fascinating company to cover, analysts say. It always maintained an open relationship with analysts and even listed them by name and company, though now a somewhat outdated practice among most publicly traded firms.
LPS spun off from banking and payments technology Fidelity National Information Services (FIS) in July 2008. FIS itself was a spin-off from former parent Fidelity National Financial and so the purchase of LPS is considered a re-acquisition, with one off-the-record analyst saying the deal was a great example of "sell high, buy low."
After four years of success, however, LPS' default servicing operations — once a driver of growth — led to a collapse in revenues.
As a recent research report from Barclays summed up: "3Q revenue decreased ~16% Y/Y to $419 million vs. guidance range of $415-435 million, while adjusted EPS was at $0.51 (vs. guidance of $0.51-55)," said the report, lead authored by Darrin Peller. "[LPS'] Default Services segment continued to soften (down ~26% Y/Y), as seriously delinquent mortgages and foreclosures overall have been declining industry-wide," the report concluded.
LPS also faced numerous headwinds in the wake of the foreclosure crisis, as allegations of fraud and bad business practices dogged various business units at the company in late 2011 and into 2012, leading to significant legal expenses as the company either defended itself or sought to settle various claims.
Despite this, not all of the LPS default-industry assets had become dogs. However, the company's technology remains widely used by nearly every major banking institution in the United States, relative to managing mortgage operations.
"The unique combination of scale, expertise and innovation continues to position Lender Processing as a leader in technology-driven solutions for the evolving mortgage industry," analysts at Zacks Investment Research recently noted, prior to the acquisition announcement in May 2013. "If the company can tide over the current negative investor perception, it can expect a steady reversal of fortunes."
It's likely safe to say that the now-blended company between Fidelity and LPS mortgage technology and services will be better able to shed those prior negative headwinds while gaining an ever-larger footprint in mortgage technology.
But the default process is only part of what made LPS what it was as a company. On the front end of mortgage closings, LPS offered data and technology products to a wide swath of major lenders nationwide. And it's this part of the LPS business that is seen as the greatest compliment to the Fidelity core title insurance business — the largest in the nation.
Despite this synergy, Morningstar's Horn is more cautious in his outlook.
"During the recent refi boom, business [in title services] was stronger, but that disappears in a rising interest rate environment," he said. "Purchase activity will not increase enough to compensate for the refi collapse in the near term."
While Fidelity has made no official comments regarding its post-merger plans, sources with knowledge of the transaction say that Fidelity plans to call its combined mortgage services Black Knight Services, a nod to Fidelity National Chairman Foley's alma mater at Army. It's unclear whether the company will operate as one unit, or if Fidelity will split technology and services into separate business units, these sources say.
And in the future, who knows? There always could be another spin-off.
