Title Insurance Firms Reverse Diversification to Unlock Value: Major players are splitting non-insurance businesses into separate firms that are more valuable as independents

Major title insurance companies have been among the busiest acquirers over the last decade and a half, buying both to consolidate the once regionally centric industry and to load up on compatible services with higher growth potential. More recently, two of the nationwide operations that developed as a result of acquisition fervor have deftly backtracked by restructuring to move the non-insurance businesses into stand-alone companies. In both cases, the parents determined they were sitting on holdings that could fetch higher P-E multiples as separately traded businesses. The latest to move is Fidelity National Financial Inc. (FNF), which is the largest single entity in title insurance with a 30% market share. FNF bundled its non-insurance operations into a separate company named Fidelity National Information Services Inc. (FNIS), filed a public offering for the new company, and plans to spin off the remainder of its interest by 2005. FNIS works for financial institutions by processing mortgages and other transactions, facilitating loans, and collecting on defaulted loans, while providing tax, credit, flood, and other property-related information. In 2003, title rival First American Corp., which had diversified into screening, investigative, and risk management services, took a different route by merging those businesses with publicly traded SEARCH.com Inc. to create First Advantage Corp. First American retains a 75% stake in First Advantage. Diversification is a compelling strategy for title firms that have engineered rollups and obtained national footprints by picking up hundreds of smallish regional players. The basic business grows modestly and is heavily dependent on sales trends in the real estate market, notably housing. But it throws off lots of cash that can be channeled into adding services to the basic platform. However, both Fidelity National and First American reached for side businesses – outsourced technology and security services, respectively – that were more valuable as independent companies. Both industries currently are in favor with the stock market. And the strategic fit was tested because the services often are sold to different customers than those that handle title insurance purchases. Besides its title insurance unit, FNF runs a specialty insurance business that includes the nation’s largest flood insurance program and is targeted as the firm’s key growth vehicle. Plans include expanding the unit’s home warranty and homeowner’s businesses beyond their primary base in California. Two other major title firms – LandAmerica Financial Group Inc. and Stewart Information Services Corp. – also have been active in rollups. But their operations beyond title insurance have been closely tied to real estate information and services. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com