NEW YORK (DOW JONES)--S1 Corp. (SONE) and Fundtech Ltd. (FNDT) agreed to combine their businesses through a stock-for-stock merger that values Fundtech at $318 million, a deal that should expand the software companies' product offerings and geographic footprint.

The deal values Fundtech--which licenses software products to banks--at $20.51 a share, a 4.7% premium to Friday's closing price. The premium is 18% when considering the stock's value before Fundtech confirmed earlier this month it was in preliminary talks with suitors that had expressed interest in a merger or acquisition.

Fundtech and other vendors that offer software products to banks have benefited from the growing volume of banking payments, which has led big banks to reevaluate legacy systems and seek out firms that can help them better process those payments. Last month, Fundtech reported its first-quarter profit jumped sharply on across-the-board revenue increases from software, maintenance and services.

Fundtech Chief Executive Reuven BenMenachem told Dow Jones Newswires that the combination would allow the companies to cover more space serving the globe's transaction banking market, as Fundtech has been more focused on corporate banking while S1 has addressed the retail market.

George Ravich, Fundtech's chief marketing officer, said transaction banking is a $650 billion industry worldwide and makes up about one-third of a bank's revenue. He said banks have invested heavily in the space, adding that the merger would allow Fundtech and S1 to offer more products to both small community and global giants.

D.A. Davidson analyst John Kraft said the merger would make it easier for the firms to sell their software products to big banks, as the deal would bolster their offerings to customers that include Bank of America Corp. (BAC) and Capital One Financial Corp. (COF).

Kraft added that S1's strengths include debit-card payments and the front-end aspects of cash management, which include user interface and experience, while Fundtech's product offerings are focused more on wholesale corporate payments and the mechanics, or backend, of cash management.

The deal will also bolster the combined company's global presence. Kraft said Fundtech is strong in India and Western Europe, while S1 is well positioned in Latin America and Africa.

While Kraft said the deal is expected to add to earnings by expanding the product portfolio and enhancing the company's global presence, he said the price wasn't particularly high, which would allow room for someone to offer more for Fundtech.

Kraft said there is likely going to be more consolidation within the financial-technology space, saying banks prefer to work with fewer vendors. He speculated that some bigger full-suite vendors that are likely to buy up niche players included Fiserv Inc. (FISV) and Fidelity National Information Services Inc. (FIS). Some targets, according to Kraft, include bill-pay vendor Online Resources Corp. (ORCC) and S1 itself, which has long been talked about as a potential takeover target.

Under terms of the deal, Fundtech shareholders will receive 2.72 shares of S1 common stock for each Fundtech ordinary share they own. Upon closing of the merger, S1 shareholders will own about 55% of the company, while Fundtech's holders will own the rest. The combined company will be called Fundtech and led by BenMenachem as chairman and Johann Dreyer, who will serve as chief executive.

The deal, which is seen adding to S1's 2012 adjusted earnings, is expected to close in the fourth quarter. It is subject to approval by shareholders at both companies, as well as various regulatory approvals.

Fundtech's shares closed Monday down 0.2% to $19.54, while S1's fell 3.7% to $7.26. Fundtech's shares traded just above $10 in July 2010, and have been steadily rising the past year.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com

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