It seems like yesterday that we were bemoaning the dwindling choices and continued vendor consolidation in the asset management vendor marketplace. Well, it’s déjà vu all over again as Yogi Berra was famous for saying. Over the past few weeks, we’ve seen two more massive deals with State Street’s long-rumored acquisition of Charles River Development finally falling into place, as well as SS&C’s purchase of Eze Software. What do these deals tell us outside of the fact that these firms are willing to invest massive amounts of cash (and in some cases, debt) in order to burrow their way into the front office?
It’s no secret that several of the larger service providers and software vendors in our space have been looking to get closer to the front office for quite some time. The fact is, you can’t espouse that you offer services for the full trade lifecycle unless you’ve got viable offerings across order management and portfolio construction, coupled with core middle and back office solutions. This has been where the historical split has manifested itself; i.e. service providers/third party administrators and large, acquisitory software houses have been predominantly focused on the middle and back office. The services and solutions (IBOR, ABOR, data management, performance measurement…) provided by these middle and back office providers certainly feeds into front office systems and provide the majority of the data that is the lifeblood of our industry; however, the systems haven’t necessarily been on the fingertips of the traders, portfolio managers, and research analysts entrusted with driving alpha in the investment management process. These acquisitions are looking to change that narrative.
When deals like this occur, I try to look at it from the point of view of the client; how will it impact their day-to-day? Most firms that we work with take a wait and see approach as it pertains to their assessment of major acquisitions and the potential impact to their operating model and application architecture. It’s a logical approach, as it’s often difficult to discern at the outset of a major acquisition exactly what the impact will be. It would be impulsive and borderline reckless to jump into an assessment or evaluation and selection process every time an application is involved in an acquisition.
That said, there is certainly due diligence that can be done in the days and weeks following such a transaction. When our clients approach us for advice in light of an acquisition, we encourage them to talk to their contacts at the vendor, both in the executive suite as well as the support staff. Here’s a few questions we encourage asset managers to ask:
- How are your vendor contacts feeling? Are they sticking to the script? Get a sense of how much this transaction is smoke and mirrors vs. a move that is aimed at improving the client experience.
- What is the talent retention policy? Are they excited to bring on a new team? It isn’t all that difficult to look at the track record of the acquiring firm and ascertain what their plans may or may not be for their shiny new toy.
- Why did they do the deal? Try to understand whether they have a history of investing back into the product or if 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, given the complexity of this industry and the cost and resource constraints inherent in achieving such a goal.
Look beyond the flowery quotes in the press releases--if you’re able to do that and perform a logical and thorough due diligence exercise, it’s typically pretty apparent why a deal was done. Once you are able to figure that out, you can make more concrete plans as to your future (or non-future) with a particular system application or service.
