More Trading-Tech Buyouts Ahead?
The recent flurry of 10-figure buyouts in the trading-technology space may have more room to run.
Earlier this week SS&C said it would buy Eze Castle Software for $1.45 billion, less than two weeks after State Street announced a $2.6 billion acquisition of Charles River Development. In April, Fidessa agreed to be acquired by Ion for $2.1 billion, turning down a bid from Temenos.
It is said that one is an example, two is a coincidence, and three is a trend. Rather than a CEO acting singularly to pursue growth, it seems there is a broad perception of unlocked value in the business of providing software to institutional trading desks.
— Brad Bailey (@bradjaybailey) July 31, 2018
“I don’t think these are a series of one-offs,” said Spencer Mindlin, capital markets analyst at Aite Group. “We’re likely to continue to see large financial services technology firms get larger through acquisitions.”
The buying rationale is about tech providers looking to fill gaps in their own offerings to better align with what end clients — big investment managers and brokerage firms — need.
“Vendors realize that clients are looking to reduce their IT costs and risks,” Mindlin told Markets Media. “Clients are now drawn to global, multi-asset, front-to-back solutions with lower total cost of ownership.”
Mergers and acquisitions in financial services technology come in waves, Mindlin noted. In 2000, following a series of regulatory changes, banks and brokers began buying execution management systems which were then perceived as threats to brokers’ traditional high-touch sales and trading models. Almost two decades later, drivers include consolidation of market share, synergies in straight through processing, and likely pressure from private equity and original investors seeking an exit.
M&A waves can feed on themselves, with each transaction making a subsequent one more likely as acquisition-minded companies see prospective dance partners being twirled away. This can bump up deal prices, which many observers see as already rich.
— Bob Graham (@bobgraham87) July 23, 2018
SS&C Technologies to Buy Eze Software from TPG, For $1.45 Billion or 14x adjusted EBITDA
peHub previously estimated an asking price of between $900 million and $1 billion when TPG made their investment in 2013.https://t.co/JBAMDeH4P2
— Carl Carrie (@carlcarrie) August 1, 2018
“High prices create a high hurdle and will likely force cost cutting and pricing adjustments in order for investors to realize the desired returns on investment,” Mindlin said. “While there are opportunities to deliver gains to clients from integration and synergies, there is also the risk for clients to experience negative effects.”
The order management system business “hasn’t been a high-growth market, so an expectation for broad expansion in order to realize a significant number of new wins is unlikely to materialize,” Mindlin added. “There just aren’t new multi-billion asset managers launching every month for vendors to go after, and the hedge fund market for technology has been relatively stagnant.”
It’s a good time to be a vendor of specialized trading technology — or in other words, a round peg when the industry has round holes to fill.
“Large firms are typically not the best at staying current and innovative,” Mindlin said. “They know they often need to acquire good technology in order to keep up, and they have the deep pockets and the desire to do deals.”
Initial market action is sanguine about a potential deal.
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