Fintech Fever Grips M&A with Fidessa Acquisition Offer

Temenos originally approached Fidessa with an offer in January, according to people familiar with the situation, and revised its offer upwards in early February. The deal values Fidessa at around £1.4 billion (approximately $2 billion), with Fidessa’s shareholders receiving £35.67 in cash for each share—representing a 36.9 percent premium on the company’s closing price on February 16. Fidessa shares have since risen by just over 47 percent since the reference date, when news of the potential agreement began to break.

“The capital markets industry is undergoing structural changes that will require it to renew its software systems,” said Andreas Andreades, executive chairman of Temenos, in a statement. “However, the current vendor landscape is fragmented and dominated by legacy technology. This creates a huge opportunity to combine the complementary product strengths of Fidessa and Temenos in the front and back office to create a highly differentiated multi-asset class end-to-end platform for capital markets that will offer best in class costs and processing capabilities.”

Spokespeople for Temenos and Fidessa did not respond to requests for further comment in time for publication. Fidessa is being advised by Rothschild, Jefferies and Numis Securities, while Temenos is advised by Credit Suisse. Legal advice for Temenos is provided by Davis Polk & Wardwell, while Cleary Gottlieb Steen & Hamilton have been retained by Fidessa.

The offer, which is being put to Fidessa’s shareholders and is subject to customary regulatory and antitrust approvals, would create a giant in capital markets and banking technology. Temenos is widely known for its core banking systems, while Fidessa focuses on trading platforms and compliance software.

Fidessa, a well-regarded vendor in European circles, has been around since 1981. Then known as Intercom Data Systems, it changed its name to royalblue Group in 1996, and eventually became known as Fidessa in 2007. At that point, around 70 percent of securities trades in London were conducted via its software, according to earnings calls at the time.

Consolidation

The vendor sector has undergone a period of consolidation of late, as post-crisis rule reform has bedded in, and established technology vendors have come under increasing pressure from challenger firms in the form of fintech.

“Before, it was relatively easy to have a wide pool of software providers, because the banks didn’t want to develop internally and there was money available to support that ecosystem,” says one person familiar with the deal at a UK investment bank, who asked to speak anonymously due to their firm being restricted on commenting on the deal under UK merger law. “Now the banks are pulling back on the number of third-party vendors they’re using for a number of reasons—cyber[security], the money being charged, reducing technical debt and realigning their technology strategies for a post-crisis world, and you don’t have that same level of general business that you once did.”

The vendor sector has also undergone a period of radical structural change; as smaller firms are either acquired or close down, the space appears to be gravitating towards a model where a number of enormous vendors hold sway at the top of the market. An example of this was the recent merger between Misys and D+H, which created one of the largest fintech firms in the world. On the buy side, SS&C Technologies continued to grow, and recently announced the acquisition of DST Global Systems, while private equity firm Blackstone agreed a $20 billion deal to purchase the financial and risk arms of Thomson Reuters.

“Added to that, there have been some marquee mergers and acquisitions in this space, and you increasingly need scale not just to compete, but to absorb losses as well,” the source says. “What we’re witnessing is a wholesale remodeling of the entire vendor sector at the moment.”

Estimates in the Temenos offer suggest that the combined group would have had revenues of $1.23 billion for the year ended December 31, 2017, making it one of the largest financial technology vendors. The combined group would also be globally diversified, the offer says, with just over 40 percent of its revenue from Europe, just under 30 percent from the Americas and 20 percent from Asia-Pacific, with the remainder from the Middle East and Africa.

Temenos would add its back- and middle-office functionality to Fidessa’s front-office platform. Headcount reductions would follow—Temenos expects reductions of less than 5 percent in general and administrative functions, and 2 percent in research and development and support functions, offset by the creation of new roles in the enlarged group. All of Fidessa’s non-executive directors would be expected to resign, and Temenos will reduce the size of the firm’s senior management team. Currently, a public company listed on the London Stock Exchange, Temenos would seek to cancel the trading of Fidessa’s shares.