In a relatively short period of time, SimCorp has helped to completely transform our front office and fund platforms, successfully replacing our legacy systems with a far superior and automated platform, across front to back.
Does the M&A trend among technology vendors present a real value proposition for the buy side?
The sustained acquisition trend in the financial software market has a long-term impact on the market landscape, not least for the end-user
Read the article and learn about:
Why the demand for front-to-back offerings continues to grow
Why some vendors and asset servicers use acquisitions to fill gaps in their offerings
Why acquisitions are no longer a short-term strategy
Why financial service providers’ choice of growth strategy can impact buy-side firms
Klaus Holse Chief Executive Officer, SimCorp
Financial service providers have different growth strategies. While some prefer organic growth, the acquisition trend in the investment management software vendor space gathers pace and widens to include asset servicers broadening the scope of their offerings. In the summer alone, large players like SS&C acquired EZE Software while State Street Global inked its deal to buy Charles River Development. While the goals may differ, M&A activity changes the competitive landscape, and many ask me; how will it impact the investment managers reliant on the technology involved?
Global buy-side firms are striving to lower the cost of ownership of their investment management solutions in a continuing low-margin environment. However, they are also facing a complex world of increasing data volumes, regulations, reporting demands, and multi-asset class complexity, which all put new demands on their operating models. This situation has spurred a growing demand for integrated front-to-back offerings, increasingly recognized to be the only solutions able to meet all these demands in a cost-efficient manner.
Large global investment managers expect their solution providers to support an increasingly complex and multi-asset portfolio lifecycle, with automated workflows, integration, and full data transparency across the front, middle, and back office. Moreover, they also expect these solutions to be operationally efficient, regularly upgraded with state-of-the-art functionality, and flexible enough to accommodate changes in customer preferences, new regulations, etc.
In a recent interview, Spencer Mindlin, Capital Markets Industry Analyst at Aite Group, said that: “Vendors realize that clients are looking to reduce their IT costs and risks. Clients are now drawn to global, multi-asset, front-to-back solutions with lower total cost of ownership.”1 As a result of this growing demand from existing and potential clients, some investment management software vendors and asset servicers are looking to stay competitive by filling technology gaps in their existing offerings. This can be done in two ways: By innovating and developing your own software and services or by strategic acquisitions of gap-filling technology from other companies.
On the back of the recent acquisitions, the latter looks to be the most popular way to go, and we should expect other software vendors and asset servicers pursuing the same strategy in their attempt to achieve full front-to-back offerings over the coming years. However, a number of challenges come with filling functionality gaps through acquisitions, e.g. the challenge of integrating an acquired product into your existing offering, often already being a mix of many solutions. Integration can be time consuming, delaying the time to market, and increased risk, due to data reconciliation between new and existing systems – all to the detriment of the buy-side clients relying on the offering acquired. As most recent acquisitions have been front-office-related, the data issue is especially important here, as reliable, real-time data is the foundation of a successful front office.
Some financial services providers are driven by more short-term tactical financial goals to support their growth. Some of these firms look for smaller players that have neglected to invest in their product, causing the company value to decrease. The more viable players in the market take this opportunity to acquire a company at a cost, which can easily be recovered by the cutbacks achieved through synergies and scale, in the consolidated entity.
What often happens is that the companies acquired are seen as cash cows, and therefore lose their independence once they are bought, affecting the people, Intellectual Property, existing clients, etc. To realize ROI quickly, shared services are mostly stripped out of the acquired business immediately. The new product is added to the roster of solutions that the existing sales people are required to sell, resulting in a corresponding reduction of sales staff in the acquired business line and an overall less-informed sales team.
Further down the road, as the acquired product sits within a stable of competing solutions, it will be rivaling for attention from management and product developers. As a result, the product risks losing out to the high performing offerings already owned by the company. Worst case, existing clients will suffer the consequences of a product sentenced to be retired sooner rather than later. In the Markets Media interview previously referenced, Mindlin also commented: “While there are opportunities to deliver gains to clients from integration and synergies, there is also the risk for clients to experience negative effects.” (For more recent industry commentary on the potential impact on buy-side clients, see the call-out box ‘Growing organically or through M&A – what’s the difference to the buy side’)
Common to the concern about the end-user impact of acquisitions expressed by many across the industry is the realization that there’s a big difference between developing a single system covering the all of the front-to-back investment management operations and using acquisitions to build a system comprised of multiple applications covering a front-to-back scope. And even if the intention really is to integrate it into one front-to-back system, this will be a paramount investment – an investment which is likely to prevent any vendor from developing other new functionality in the meantime – and a quest we remain to see a vendor succeed with.
About the author
Klaus Holse has held present position since September 2012. Before joining SimCorp Klaus Holse was with Microsoft since 2001, most recently as Area Vice President of Western Europe and Corporate Vice President at Microsoft Corporation where he was responsible for Microsoft’s business in 14 Western European countries. Other positions in Microsoft count Corporate Vice president, Sales and Operations for Microsoft Dynamics, as well as General Manager for Microsoft Germany. Before joining Microsoft Klaus Holse was 12 years with Oracle, with five years at the Corporate HQ in California and a position as Senior Vice President. Klaus Holse has also been the CEO of a smaller listed software company as well as CEO for a VC fund.
1. ‘More Trading-Tech Buyouts Ahead?’, MarketsMedia, August 1, 2018.
Growing organically or through M&A – what’s the difference to the buy side?
A quick scan of websites, blog posts and recent commentary from the consultancy community indicate that advisory regarding the potential impact of acquisitions is being ramped up. This is confirmed in a series of consultant interviews recently performed by the Journal. Below, you find an extract of the consultant commentary on the potential impact of acquisitions on the buy-side firms involved.
According to Brad Bailey, Capital Markets Research Director at Celent, a firm relying on a system which is being acquired should consider: “Is the acquiring vendor’s motive strategic or financial and what’s the likelihood of potential benefits and risks?
Potential benefits include; your system will get more attention, better integration with other systems (for strategic buyers), better workflows, better data leverage, and the opportunity to consolidate precious trader desktop real-estate.
Potential risks include; that the acquirer will decrease service levels and R&D resources to meet the stated M&A pre-deal accretion analysis and that true integration with a host of other systems might not be as easy as it sounds.”
Thomas J. Secaur, Global Chief Operating Officer, Citisoft, tries to put himself in the seat of the client of the acquired product: “The glut of acquisitions has resulted in fewer viable solutions in the marketplace and you should ask yourself:
Why was the deal really done?
What are the vendor’s plans with the new team and its talent, and for investing back into the product – do they have a history of acquiring competitors and sunsetting their technology?
Have they proven that they are capable of integration across the various investment system components housed under their roof? Dig deep here - this type of integration is easier said than done.
Once you perform this due diligence, you can make more concrete plans as to your future (or non-future) with a particular system application or service.”
Elaborating on his Markets and Media interview, Spencer Mindlin, Capital Markets Industry Analyst at Aite Group comments to the Journal on front office acquisitions particularly: “Integration is hard: Products in the front-office trading technology space are extremely complex. Attempts to integrate systems that are often fundamentally different in programming language, architecture, and infrastructure design can result in workflows and user experiences that feel like band-aid solutions. It can be technically challenging to realize immediate returns and deliver on the promise of integrated systems to clients.”
Finally commenting on the M&A trend, Managing Director Jeremy Hurwitz, Accenture, adds: “One aspect to bear in mind is the strategy of onboarding the acquired platform. If this is done as an “as-is” transfer of a platform, this could mean that it looks like a single platform but is in fact still separate systems and that benefits of a consolidated platform may be difficult or take much longer to achieve. Clients impacted should have honest conversations with their vendors about plans for the acquired technology and whether true system integration is the goal, or they will stay separate systems behind some type of sales or service wrapper. With this information, a firm can evaluate whether these platforms still fit into their overall technology roadmap.”
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