Looking to greatly expand their capabilities in financial services, many technology companies have been on a buying spree. This is good news for financial institutions looking to manage fewer vendor relationships, instead choosing to focus their efforts on compliance and strategically focused IT investments.
In the past 10 months alone, practically all of the major bank technology vendors-Fair Isaac, Fiserv, Jack Henry, Experian, Metavante, Corillian, Fidelity National and Oracle among them-have been snapping up smaller boutique tech shops like rich Europeans gobbling up shiny new condos in Miami. And while there's been splashy market penetration through high-profile deals such as Oracle's acquisition of Siebel, for example, most of the buys have been stealth pickups of smaller shops, deals usually below the $1 billion mark. The aim has been to give bankers a broad range of technology choices from one place. This has resulted in lots of deals like Fiserv buying BillMatrix, Jack Henry nabbing Tangent Analytics and a host of other similar transactions. Jack Henry alone has purchased more than 15 companies in the past two years; the decision for the company now is how to brand these additions to the Jack Henry team so that the banking world knows JHA's deep bench strength.
"We've been on a more rapid pace of consolidation in 2005 than in the other years we've been in the market," says Joel Kallet, a partner at Updata Capital, an investment banking firm that specializes in mergers and acquisitions in the IT industry. "But what's also noteworthy are the types of deals that are getting done."
Amid the usual big deals, there's an ongoing push by IT firms to demonstrate not only scale but breadth to their institutional customers, which are facing pressures of their own to streamline tech strategy. When the banks themselves do a big acquisition, they want their tech conversions to be as simple as possible-with no functional, cultural, security or regulatory headaches. "As the financial institutions consolidate, they want to narrow the vendor bench, so the larger vendors are looking to have a broader suite to be the one-stop shop," Kallet says. "They're not there yet, and may never get there, but they do want to be able to provide a deeper product set."
Capabilities such as bill payment, security, business intelligence, risk management and document storage are becoming more complex. As such, larger technology companies are choosing to expand into these segments by buying smaller, niche players with defined areas of expertise rather than wasting time and money building their own solutions. Simply put, acquiring expertise is just a faster way to broaden a technology company's product suite.
As tech firms continue to accumulate new expertise, they're able to claim not only increased versatility, but easier upgrades, conversions and build outs-since more of an institution's technology comes from the same source.
"Integration is the challenge, whether you're integrating data, systems, or whatever," says Bill Doyle, an analyst at Forrester Research. "It's very tough work, and it's far preferable for a bank or a brokerage house of any size to slough that work off on a provider. And these [tech acquisitions] are a way to limit the amount of integration work that firms have to do with each other. You can go to a firm like JPMorgan Chase and say 'you don't have to buy three pieces because we've got it all.'"
There's also hard financial realities for smaller IT firms that are making them targets. "In order to be a thriving public company in 2005 and beyond, size, scale and breadth are critical. It's hard to be a $300 million market cap company today. It's getting hard to get investors," Kallet says.
Kallet says one casualty of the trend may be innovation, as specialized tech shops get absorbed into larger firms. "When you consider what happens to cutting-edge technology and breakthroughs, I believe that consolidation will stifle that," he says. "But there will continue to be companies that develop new technology for those who want the best of breed. You'll see some loss of innovation, but financial services is such a large IT market. It makes up 21 percent of the IT spending in the U.S. for a sector that's only 8 percent or 9 percent of GDP, and that will attract some dollars in innovation."
That means there's still some daylight for boutique firms, particularly since many institutions feel so pressured by some of the industry's macro issues that they may want specialists. "Whether it be security, payments or check 21 solutions, there are still firms that specialize in technology in these areas that are gaining traction," Kallet says.
