Even as industry insiders speculated that Bisys Group would sell to a private equity firm and that top management wanted to keep the back-office specialist together, the opposite was happening.

Wednesday, financial services giant CitiGroup scooped up the firm after arranging for a buyer of its insurance service unit. Bisys officials from the unit were not immediately available for comment.

What the deal means to Bisys Fund Services' clients is not immediately clear. However, some sources speculate that Citi buying the fund services group may unsettle some of Bisys' bank mutual fund clients. Banks have long been Bisys Fund Services bread-and-butter business.

All counted, Bisys officials claim about 80 clients, for which it services 1,300 registered and non-registered mutual funds. The company has approximately $500 billion in assets under administration, according to its corporate Web site.

The services offered to mutual funds by Bisys include -- administration and accounting, transfer agency and shareholder services, compliance and regulatory support, and marketing and distribution solutions.

"I didn't think the margins would be enough for Citi", said Richard Sincere of Sincere & Co. "It is a good deal for Bisys though, the Citi has a good name behind it."

He also wondered how the bank clients will react to the news, "Citi is so strong in the banking channel, do banks want to open their books to one of their rivals?"

Neil Bathon of PMR Associates LLC, however, thinks Citi shouldn't face problems with banks.

"State Street and PFPC are also backed by banks," Bathon pointed out to The MFWire, "and they have not had to deal with any credibility issues."

Burt Greenwald of Philadelphia-based B.J Greenwald consultants told the MFWire that, "the sale is surprising given Citi's sorry track record on funds, it's interesting that they want to get back in the business."

Greenwald speculates that the, "combined credibility problems of Citi and Bisys could create issues for both of their clients."

As for what Citi may want to gain from the sale Greenwald thinks scale is the most important aspect, "Bisys was too diversified, they never had scale. It's tough to make money in the industry unless you have scale."

However, published reports suggest that Citi executives see the deal as a way to speed the bank's entry into the hedge fund servicing business. Bisys' hedge fund and mutual fund services operate as two related groups. However, their client lists do not entirely overlap.

Bisys' rivals in the fund services game -- which include PFPC, DST and State Street among others -- could find that the deal is an opportunity to land more business from Bisys' client ranks.

Some of those clients were already looking to move because of the possibility of a sale and Bisys' settlement of SEC-related charges brought against its fund administrative unit.

This month Fifth Third Bank and BB&T decamped from Bisys for State Street and PFPC respectively.

Still, the deal is a rich one for Bisys Group shareholders. The stock swap is valued at approximately $1.45 billion with Bisys shareholders receiving $12.00 in cash per share when the deal is final. That amount includes a special dividend of $0.15 per share in cash payable by Bisys, and conditioned upon the closing of the acquisition, for total consideration of $1.47 billion.

Citi officials said the bank will combine BISYS Fund Services and Alternative Investment Services, which provide administration and distribution services for mutual funds, hedge funds, private equity funds, and other investment products, with its own operations to create a leader in the Investment Servicing industry with expanded global presence and broader product offerings in these areas.

Simultaneously, JC Flowers, a private equity firm, would acquire BISYS’ Insurance Services Group and Retirement Services business from Citi. The Insurance Services Group provides independent wholesale distribution of life insurance and commercial property/casualty insurance, among other activities. JC Flowers will be combining its existing commercial insurance business, Crump, with BISYS Commercial Insurance Services to achieve greater scale. In addition, JC Flowers’ acquisition of BISYS’ life insurance and retirement services business has the potential for creating a leading integrated provider of wholesale insurance brokerage and retirement services solutions.

Bear Stearns advised BISYS, with Merrill Lynch serving as financial advisor to the Special Committee of independent directors of BISYS's board. Skadden, Arps, Slate, Meagher & Flom LLP is serving as BISYS's legal counsel. Paul, Weiss, Rifkind, Wharton and Garrison LLP is also serving as legal counsel to the Special Committee of independent directors of BISYS's board.  

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