Will customers benefit from the sungard-infinity financial merger?

The world, they say, is a small place-and in risk management, getting smaller all the time. On October 17th, SunGard Data Systems Inc. announced that it had reached an agreement to merge with Mountain View, CA-based Infinity Financial Technology in a stock-for-stock transaction in which each share of Infinity common stock will be exchanged for 0.68 of a share of SunGard common stock. The stock swap values the eight-year-old financial trading and risk management technology firm, founded by CEO Roger Lang, at $313 million.

Ironically, the deal comes on the heels of S.W.I.F.T.'s annual SIBOS conference, held in Sydney, Australia, just a week or so prior to the merger. It was at SIBOS that SunGard's Panorama developers pointedly contrasted their system with that of Infinity Financial Technology, a competitor in the esoteric risk management technology business where outsized brains and egos constantly jostle for advantage. "We have a system, not a project," said Panorama vice president Ian Green during a detailed presentation at the Regent Hotel.

Small world indeed. Green's competitive posturing aside, Infinity Financial Technology develops products for derivatives trading and risk management. Its off-the-shelf applications run on Windows NT and Unix operating systems and are based on the company's Data Model and Fin++ Class Library.

Infinity is arguably best known for its tool kit, which some sources contend can take a long time to install. "It has always had the reputation for taking a long time to develop a product or application," says one industry consultant, adding that Infinity's strong reputation for good service is what helps it win contracts.

in-house competition

This sort of in-market mud-slinging isn't new, but it masks some of the real questions presented by the merger, such as what short-term benefits can be realized by customers; how the merger's newly fostered internal competition will play out in the marketplace; and what synergies between SunGard and Infinity, if any, can be mined over the long term. And more, does this deal mark the beginning of the commoditization of risk management, where the industry is left with SunGard, Misys and Reuters? For many sources, the answers aren't readily apparent.

Top of mind for most industry observers: Now that Panorama and Infinity are part of the same company, are they going to be polite to each other? Probably not, says Richard Walker, senior product marketing manager at Infinity, who doesn't expect the sniping from Panorama to change much in coming months. "They have a competing product and the SunGard organizations do compete in the marketplace."

Is this any way to run a company? Judging by SunGard's record, both in sales and on the New York Stock Exchange, the answer appears to be "Yes." At SunGard, divisions compete just as aggressively against each other as they do with outside vendors. Chris Conde, CEO of the 1,000-employee SunGard Trading Systems subsidiary, says SunGard values independence so much that the firm would rather have its companies compete with each other than seek to curtail their independence. "Our basic strategy is to buy successful companies on the way up, give them capital and some advice, and then they can make even more money. It's a very simple model."

SunGard Data Systems has four main business areas-investment support systems for the financial services industry, which generated 61 percent of 1996 revenues; disaster recovery, 29 percent; outsourcing, 5 percent; and health care at 5 percent.

In financial services, its portfolio includes mutual fund processing, bank trust systems, capital markets and derivatives technology. On the face of it, SunGard, with Devon, Infinity, Panorama, Renaissance and Front in the derivatives area, has ample room for merging products, streamlining its suite of software offerings and achieving synergy, that popular, if often elusive, goal of rationalization. Conde isn't interested in such grand plans-for now.

SunGard doesn't believe in central planning and five-year plans, he says. Acquiring entrepreneurial software companies is tricky, adds Conde, because shuffling management and changing strategy risks destroying the value of the acquisition.

At SunGard, the management of a company presents its plans to the corporation. "We approve their plans and then we leave them alone to take care of it. If any unit, whether a recent acquisition or an old one, doesn't perform, we take corrective actions just as any other business would. We have a high success rate in acquisition and we retain many company founders because we offer entrepreneurs freedom, some guidance, and a lot of capital. It's very unusual to have such a success rate in software." Conde, who was a founder of Devon, cites himself as an example. He rose through the ranks of SunGard after selling them the back-office derivatives software company.

Deborah Williams, founder and principal of Meridien Research Inc., based in Needham, MA, expects that Conde will leave Infinity alone. "He and (Infinity CEO) Roger Lang have known each other a long time, and Conde has been offering to buy Infinity for years." Eventually, she says, some of the SunGard products might build on the Infinity platform, but for the immediate future they'll continue elbowing each other through the request for proposal process at banks around the world. "They are all in various stages of product development; they have major releases to get out."

Igor Lamser, a principal in Technology Solutions Company, a risk management consultant, was at Renaissance when SunGard acquired it. "SunGard will leave them alone, just as it did to some degree at Renaissance, until they stopped making money and Sungard put in its own management team. SunGard's rule is to compete in the same environment. All the companies can go head to head, and whoever wins, SunGard Data Systems wins and you cheer the winner. But during the fight, you fight for yourself. Compared to Reuters or Misys, Sungard seems relatively benevolent."

In the stock market, SunGard's is a winning strategy. "Its approach has worked well over 10 years," says Edward Caso, an equities researcher at BT Alex. Brown Inc. in Baltimore. "It gives control to the entrepreneurs who created the business in the first place and they do that in the context of very tight budgeting and financial controls. As long as the companies continue to work within their agreed upon targets, management at the corporation gives them a tremendous amount of flexibility to get the job done. If they fall out of those mechanisms, then there is a higher level of oversight and change."

For SunGard, the results have been an enviable earnings record, Caso adds. The company acquires within market segments, almost all in financial technology, and over time some of the individual lines grow together, but that is not a priority, he adds. "You've got some fairly complex software and services; the only way to prevent the sales guy from not knowing what he is selling is to keep him focused."

Infinity's Walker says customers have called to ask what impact the acquisition will have. "We have reassured them that it is business as usual. Now we are part of a 4,000-person organization rather than a company of 200, but otherwise we are still competing with the same people, whether they are SunGard or not."

Caso forecasts that SunGard's earnings per share will grow at 18 percent or more and believes revenues will grow in the high teens annually. Revenue increases depend on acquisitions, since the firm's internal growth is running at 10 to 13 percent, he adds.

SunGard has been on a buying spree. Recently it acquired ADS Associates, a workstation-based trading applications company located in California, and BancWare, an asset/liability and profitability systems firm based in Boston. "Its ultimate goal is to buy the whole market, to be the provider of systems for the capital markets," says Lamser.

Meridien's Williams suspects that SunGard's challenge is to invest. "It has a ton of cash sitting around and its challenge is to reinvest all the excess revenue so it doesn't have a pile of cash sitting around, and there's not much in the industry to spend it on. Infinity (Financial Technology) wasn't a bad choice, since it is the market leader and one of the biggest forces in the industry."

BT Alex. Brown's Caso, in a June report on SunGard, noted it had $50 million in cash and $42 million in debt. "After a long period of cash balance, the company has been managing with around a zero net debt position," he adds. "SunGard should be a significant generator of cash, which should continue going forward."

SunGard's Conde intends to leave the technology company's strategy in place. "Each (SunGard) company has its own product strategy and it's own business strategy. Our success has come from our basic philosophy: You leave it alone and it makes money for you."

-groenfeldt tfn.com

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