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The
investment management industry has been jolted because
critical suppliers of information technology have been
through a flurry of mergers and acquisitions, failures
and near failures. These events are reminders to investment
management firms of the importance of assessing and monitoring
vendor risk.
IDS
suffered a “near-death experience” as a result of a failed
strategy to create an ASP version for RIAs. IDS’s financial
backers closed the company’s doors, and within a week
they were reopened with the short-term goal of finding
a buyer. In the meantime, key IDS staffers left. Lifeharbor
was “sold” by its venture capital investors to Vestmark,
which acquired the code but none of the developers.
In
one of the largest leveraged buyouts ever, SunGard will
be acquired by a consortium of seven firms, including
Silver Lake Partners, Kohlberg Kravis and Roberts, The
Carlyle Group, Bain & Co., Texas Pacific Group, Blackstone
Group and Thomas H. Lee Partners. FMC and Financial
Interactive were acquired by SS&C; then SS&C
announced that it had accepted a buyout from The Carlyle
Group.
ITG
has acquired Macgregor, and other OMS vendors have had
offers. There has been a scramble to consolidate
exchanges and electronic trading venues. For example,
NYSE has acquired Archipelago and Nasdaq acquired Instinet.
In
the past year there have been a host of other technology
acquisitions, as FactSet purchased both StreamVPN and
Derivative Solutions, StatPro acquired Delve, and JPMorgan
acquired Neovest, just to name a few.
Investment
Software Buying Has Heated Up
At the same time that investment service providers
and software vendors are undergoing significant ownership
changes and consolidations, investment firms have greatly
increased purchasing activity at a level not seen since
the Tech Bubble Collapse. Even vendors of portfolio accounting
systems have emerged from the doldrums and are experiencing
activity not seen since the late 1990s.
What
Does It Mean To Customers?
Aggressive financial buyers will be driving the strategic
direction and operating models of many investment software
companies, and customers need to understand the implications
for their business. Buyout firms will do whatever
it takes to increase profitability and enhance the acquired
firms' attractiveness for eventual public offerings and,
as a result, the goals of the financial buyers may not
be in synch with clients. Just as IDS clients discovered,
a change in strategy can lead to a stagnant product that
doesn’t have key support and development staff.
SunGard,
FMC, and SS&C all have a wide range of products. Clients
should reasonably expect marginal or unprofitable products
to go away. To enhance profit margins, buyout firms
will likely insist that mature products that have limited
market opportunities be starved for support and enhancements.
Consequently, promised upgrades for mature products will
remain exactly that, promises.
What
Should IT Managers Do?
Clearly, the impact of ownership changes needs to be
part of any software or service acquisition evaluation. Assessing
what might change under new owners becomes somewhat of
a guessing game; but not buying products that aren’t selling
or that have a limited client base are good places to start.
In addition, installed software and information technology
services must be part of an ongoing planning and risk assessment
process. IT and operations managers need contingency
plans for the products that might be decommissioned or
not supported.
Market
leaders have already implemented plans to deal with the
vast array of fragmented systems and services. They
have mitigated vendor risk through rationalization of
current systems, and they have established stricter acquisition
standards. And they keep their eyes open
and their fingers crossed.
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