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Financial Information and Technology Trends

21 Jul

Financial Information and Technology Trends

The Financial Information and Technology (FinTech) sector of the economy has shown signs of growth, despite the reluctance for a true recovery to emerge. Yet there remain signs of substantial economic improvement as revenue, operating profit, and M&A transactions have all increased within the sector.  For instance, in the first half of 2010, there has been a 31% increase in the number of transactions and a 248% increase in the value of transactions versus the last six months of 2009.  This growth has pushed multiples up, with the average revenue multiple challenging the 2007 highs of 2.3 and the EBITDA multiples approaching 2007 of about 16.0.

Strategic buyers have led this growth, completing approximately 83% of the total transactions, and in turn representing approximately 56% of the total transaction value within the sector.

While it is not perfectly understood why smaller companies are selling – two thirds of all deals were below $245 million -we have heard that the timing of such sales is heavily predicated upon entrepreneurs’ calculated avoidance of next years’ higher capital gains tax and the recent rise in multiples.

Payment processing companies have received a fair amount of attention from buyers, with online and mobile payment processing and automation have both seen several significant acquisitions: Visa, Inc.’s acquisition of CyberSource, TPG Capital’s acquisition of Vertafore, Inc. and Jack Henry’s purchase of iPay Technologies, Inc.  The payment automation and processing space may be consolidating due to the appearance of over-capacity and the need for more efficient end-to-end online and mobile processing systems.

On the capital markets side the trend appears to lie in the consolidation of research providers and push into social media.  Of the 44 deals in capital markets, roughly 20% of them were in research: Morningstar purchasing Old Broad Street, Aegis and Realpoint, followed by MSCI’s purchase of Risk Metrics and FactSet’s acquisition of MarketMetrics.  We expect to see continued consolidation in a market where small companies vie for rare discretionary funds and large companies refocus after their Global Settlement moratorium.

Alongside of the research trend, we see FiServ’s acquisition of Advice America, an online collaborative offering in wealth management, as a pivotal turn in wealth management industry.  Technology providers will continue to add social media and web 2.0 collaboration tools to round out their more traditional solutions to improve both customer relations and efficacy of programs.  MarkIt’s acquisition of Wall Street On Demand may also be a sign that collaboration tools (one of their offerings), rather than CRM providers, will continue to gain relevance within wealth management and retail brokerage.

Admittedly, it may fall short of a bona fide trend, but we nonetheless see continued demand for compliance information and tools.  It is our opinion that Complinet, a recent purchase of Thomson Legal and Regulatory, will be utilized to help strengthen ThomsonReuters already powerful position in the capital markets.

On the banking side, an overwhelming need of process automation will drive acquisitions.  Banks and technology service providers are seeing value in process automation systems as demonstrated by the recent acquisitions of Speranza, Equifax, NextStep Technologies and Inmatrix.   We believe banks will continue to seek operating efficiencies in the post – financial reform marketplace.

In addition to banking automation, new mortgage technologies will continue to be developed and attractive to buyers, including analytic programs helping both mortgagors and service providers manage defaults.

Although not reflected in recent activity, we see an increasing appetite for mobile applications in the Capital Markets.  Companies such as ThomsonReuters, Bloomberg, IDC, FactSet, Morningstar, CaptitalIQ, SunGard, Fidelity, TD, Scottrade, IPREO and Dealogic among others will need to establish a more ubiquitous platform, providing the user the ability to gain increased levels of information on Blackberry, Iphone and other smart phone devices.  With the recent rise in smart phone adoption, increased usage and greater levels of wireless connectivity it seems only sensible that mobility in financial services correlates with the broader trends.

At the core of our observations lie a few trends:

  1. We believe that research providers will continue to be consolidated at compelling values, with companies like Morningstar and FactSet leading the charge.
  2. We believe that the capital markets will continue to seek solutions that help professionals communicate with their clients.
  3. With relation to banks, we see a continued push toward technologies that streamline processes, eliminate paper and help remove redundant costs.
  4. Although not evident in recent activity, we feel as though strategic and private equity sponsors will continue to invest in multi-asset class, ultra-low latency platforms, with FX, futures and commodity trading platforms leading the way.
  5. We expect Asian FinTech companies to become highly competitive in the U.S. and EMEA with the continued diversification of assets from the U.S. to Asia.

If you would like to discuss the information in this article, receive a more detailed report or discuss market opportunities you can reach Christopher Young, Managing Director of M&A at Berkery Noyes at Christopher.young@berkerynoyes.com or phone 646-442-7998.

The FINANCIAL REFORM BILL – Times of Uncertainty

16 Jul

One is not hard pressed to appreciate the energy and execution ability of President Obama.  Since he took office, he has passed the Healthcare Reform Bill, the Economic Stimulus Package and the most recent Financial Reform Bill.  Despite his ability to get this legislation through the House and Senate and despite his appeared real conviction for these bills’s value, he has suffered dramatically in public opinion and support.  In many ways I appreciate his willingness to stand up and lead, even in spite of his most likely short lived presidency.

Regardless of his willingness to lead and take decisive action in hard times, it appears to me and most of the United States’ population that something is amiss with his policies. The most likely candidate for his continuous decline in public support may have something to do with uncertainty.  It seems as though the Healthcare Reform Bill and even more the Financial Reform Bill are fraught with ambiguity and lack of insight into the economic impact these bills may have on the business and financial community.

To help explain this uncertainty, let’s briefly analyze the Financial Reform Bill (FRB) that was approved by the Senate yesterday.  The bill touches all financial regulatory bodies and creates new financial regulators and offices that add to the already complex nature of financial regulation.  According to SIFMA, the FRB contains 456 actions that need to be implemented.  These actions may include conducting studies to analyze systemic risk across the economy or creating new reports to be shared across many of the financial regulatory agencies.  The takeaways from these actions are that they will be conducted over the next 3 years with many studies and actions taking place over the next 12 months.

Inherent within this bill is the fact that uncertainty of the real economic impact to the financial community will not be known in totality until 36 months from the time the bill is signed into law.  Sure, there will be periodic updates and learning’s that will help put some clarity around the impact but the true costs will not be known for some time.  Yesterday at the SIFMA Summit of Regulatory Reform some of the financial forecasts put forward were that investment banks would suffer a 4-8% decrease in return on equity, whereas some retail banks may do worse. In addition, many were calling for smaller retail and commercial banks to begin a consolidation cycle because the costs to maintain and report on the new reform may be burdensome.  Others were stating that the consumer will be hurt because the regulatory costs will be transferred to them with the chances of eliminating ‘free-checking’ accounts and potentially increasing ATM fees and loan fees.  Rather than provide increased competition in the financial community it appears at the surface that this bill creates a barrier to entry for the larger financial institutions.

In addition to the 456 actions the bill requires the creation of new organizations, such as the Financial Stability Oversight Council which is chartered with reporting on systemic risk, derivatives and will have authority on liquidating failing financial institutions.  Another noted organization is the Office of Financial Research which will be part of the Treasury and will be chartered with aggregating financial data across the economy.  This office, although not described well in the bill sounds a bit like the Office of the Director of National Intelligence in the sense that they aggregate intelligence data and encourage collaboration across the intelligence community.

The main speaker at the SIFMA conference yesterday was Deputy Secretary of the Treasury, Neil Wolin.  When prompted with questions on the ‘how’, ‘when’ and ‘costs’ of the bill, Neil seemed to politely dodge the question.  The outcome of Neil’s discussion was that we will need to wait and see how the studies go and the recommendations that will be made by each of the regulatory bodies before we know the ‘how’, ‘when’ and ‘costs’.

Unfortunately there are takeaways from the bill that need to be highlighted.  First, the bill is overly aggressive which will only increase the chances of poor implementation and lack of intelligent policy.   For a frame of reference, major corporations only take on about 6 or less emphasized activities in a given year.  Second, the bill leaves substantial ambiguity and lack of a clear path that is needed to encourage banks to lend, businesses to borrow and hire and financial markets to rally.  Third, the bill aids the larger financial institutions, eliminating competition and potentially creating the next ‘To Big To Fail” institution.

At the core of this bill I think is the unfortunate yet true spirit of a zealous administration shrouded with populist intentions. In a time when we need clear regulatory guidance, a welcomed business and financial climate and a sense of leadership that galvanizes the American population, President Obama and his administration delivered a bill that is extremely vague creating an economy of uncertainty which will only continue to push out lending, borrowing and hiring – once again creating the appeared division between Main Street and Wall Street.

The End of the Market Data Desktop (Part 2)

1 Jul

Last week I wrote “The End of the Market Data Desktop”.  Since that posting I received more than a handful of emails from friends, colleagues and clients telling me that I am crazy and that there is no way that financial professionals can do without market data, analytical tools, dashboards, streaming quotes, etc…

I Feel the Need

Let me first say that I was referring mainly to retail broker dealers and wealth management professionals in my post and I was definitely not making reference to institutional brokers/ traders, algo / black box guys, or any other financial professional that takes security positions or makes markets at the smallest fraction of a percent.  The reason for my posting was mainly to say that wealth management professionals need new tools that help them build deeper relationships with their clients as they continue to offset the analytical work to their portfolio managers.

I think there is tremendous upside in building next generation relationship tools for the wealth management professional.  Rather than security dashboards and scrolling news, perhaps it makes sense to have a dashboard aggregating everything about a client.  Does it make sense in this social media world to aggregate items such as Facebook and or LinkedIn updates, changes in credit ratings, money in motion events, news about the client, their portfolio or their interests, twitter posts, blog updates, etc…? After all isn’t sales knowing about your client and understanding their needs?

The second part of my posting was related to communication tools.  How does a wealth manager communicate with their client regularly? Few do the obvious – talk.  In the age of social media perhaps wealth managers can do better by having a communication platform that allows instant communication in a one-to-many platform, all wrapped around a compliant rich framework.  How great would it be if wealth managers were able to Tweet, update LinkedIn, Facebook, their blog, their website all with a single platform?  What about knowing how many of their clients are reading their weekly or monthly newsletter or perhaps worse, those who do not.  Social media is opening a new world for sell-side financial professionals and financial technology firms need to address these needs if they want to maintain their market share of the wealth manager desktop.

– Need for Speed

I thought that while I am at it, perhaps it makes sense to address the trading needs of the wealth management professional, particularly those who service the Family Office and Ultra-High Net Worth individual.

Yesterday, Scott Patterson of the Wall Street Journal wrote an insightful article “Fast Traders Face Off with Big Investors Over ‘Gaming’”.  In this article Patterson recognized that high-frequency traders who tend to trade on algorithmic triggers are front running traditional traders, those who are not using algorithmic models and who are not dialed in directly with the exchanges.  So, this brings me to the second part of observation.

Today, low latency trading systems are typically used by the buyside investment management firms and or hedge funds and are not used by traditional traders or portfolio managers who tend to support wealth management practices — atleast not the smaller shops. So my speculation is that at some point low latency trading systems will have to be built and or purchased from technology firms who support retail brokerages and wealth managers.  I would imagine that at some point wealth management firms will be fed up with the idea of losing out to algo traders who are making a killing on very small movements in spreads and execution timing differences.  Are we getting closer to the time when LPL, RayJay, TD, RBC, Pershing and others offer ultra low latency execution?

Overall it seems as though the wealth management technology vendors will continue to go through major changes – with one change coming in the form of building relationship tools and other ensuring that their back end trading and execution systems are more closely competitive with those systems supported by ultra low latency execution.

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