The Big Crunch: Traditional Tech’s Great Contraction

Waters examines how this recent wave of consolidation is different than previous periods of contraction.

M&A activity is fundamentally reshaping the vendor sector as firms are bought, sold and merge both by and with each other.

• A number of factors are driving this, some economic and some technical, but firms in the middle are being increasingly squeezed.

• As such, the market risks becoming bifurcated between massive one-stop stop titans and agile, well-funded startups.

The Big Crunch theory postulates that while the universe is continuously expanding, at some point it will collapse upon itself because as expansion slows, the mutual gravitational attraction of all the matter in the universe will, essentially, tug back the edges of the universe like a blanket pulled from the edge of a bed. The result is a fiery contraction into a singularity.

The mergers and acquisitions (M&A) space in the capital markets feels as though we’re currently experiencing something of a Technology Big Crunch. In just the first two months of 2018 we’ve seen some whopper deals. At the beginning of the year, SS&C Technologies continued along with its own universe’s expansion by acquiring DST Systems for $5.4 billion, picking up the other part of the company it didn’t own after its 2014 purchase of DST Global for $95 million. A couple of weeks later, Thomson Reuters agreed to spin off its Financial & Risk business unit to a consortium led by Blackstone Group in a deal valued at $20 billion. 

Then, in the first week of February, ION Investment Group—with the help of Carlyle Group—snapped up Openlink, consolidating its power in the treasury, derivatives and commodities spaces for an undisclosed amount. And, finally, on February 21, Fidessa’s senior management recommended that its shareholders accept an all-cash acquisition bid worth £1.4 billion ($2 billion) from Geneva-based banking technology giant Temenos, sending the London-headquartered firm’s shares soaring by almost 50 percent in a few days. 

While massive mergers are hardly new in the world of financial-market technology, there are some undercurrents that point to this latest round of M&A resulting from a true market shift. “Data, cloud and fintech—each of these mergers is different…but those three things are powerful themes in all of these deals,” says Brad Bailey, research director in Celent’s capital markets division.

This market shift can be attributed to a number of factors. First, the rise of fintechs—which, for the purposes of this article, are defined as startups younger than five years old that are still taking in Series A, B or C funding rounds—has proven to be a disruptive force in some areas of the financial markets, as banks, large asset managers, regulators and stalwart vendors struggle with how to deal with these agile incumbents. In many cases, the laser focus of these firms has allowed them to respond to changing market conditions, and deal with discrete, niche elements of market technology in a far more elegant way than incumbent providers.

Second, tools delivered via the cloud have become ubiquitous, thus allowing users to more easily switch to new vendors. But even more than that, capital markets firms have not only embraced public cloud providers like Amazon Web Services, Microsoft Azure, Google Cloud Platform and IBM Cloud, but they are coupling these services to take advantage of their unique capabilitiesAWS with its myriad of tools, plug-ins and geographical heft; Azure with its workflow solutions and linkages to Outlook; Google and its sway with high-frequency trading firms in Chicago that are hungry for high-speed analytics; and IBM, too, which has made inroads with its focus on the regulatory technology (RegTech) space and cognitive computing, not to mention its efforts in quantum computing. As processing power continues to explode—along with the amount of data being generated on a daily basis—and as the cost to store data continues to drop, financial services firms will increasingly look to these massive cloud providers to take some of those infrastructure burdens off their plate. 

Third, as fintech firms proliferate in the market, banks and large asset managers are either investing directly in these startups or creating consortiums with other institutions to tackle industry-wide issues (think blockchain). This allows banks to lessen their research and development costs, or at least allows them to target specific projects that are deemed most likely to yield immediate results, while mutualizing the cost among peers and avoiding failure risk from being a first-mover.

Finally—and, perhaps, most worryingly—this appears to be wiping out the market for independent, mid-sized vendors. As consolidation leads to behemoths at the same time that banks and venture capital firms are throwing their money at small, innovative fintechs, mid-sized companies are left in an awkward position where they’re going to have to find a dance partner to improve their economies of scale, or risk getting passed by one of those innovative fintechs and forgotten about by the banks and asset managers. 


The Thomson Reuters and Fidessa acquisitions serve as interesting bellwethers for what the technology industry will face going forward: Thomson Reuters is itself a massive data and platform provider that had—by some estimates, and according to several sources—become an institution that needed to get back to basics. And Fidessa is a growing company that managed to keep some of its technology feel even in the close-knit City financial scene, but one which, insiders claim, had begun to lose its direction and desperately needed a partner.

“The Thomson Reuters-Blackstone deal is fascinating,” says Bailey. “If you look at all the different assets that fit in F&R, you see a massive touchpoint within all the financial markets and this amazing, untapped data resource. If you’re thinking about the big picture of data—all different types of data—it’s powerful.”

Several sources who have spoken to Waters since the Blackstone announcement said that Thomson Reuters had become too spread out through acquisition and in its desire to knock Bloomberg off as the terminal king through its Eikon offering, an ambition that was never fully realized despite a number of significant partnerships with challenger firms, including Symphony. Private equity firm Blackstone—which was joined by the Canada Pension Plan Investment Board and Singapore-based investment firm GIC, which manages the Singapore Government’s foreign reserves, in the deal—will look to provide a boost to its information-services business. 

A source with knowledge of the deal said that while the Finance & Risk unit returned to growth in 2017, with today’s pace of change in M&A increasing, this merger will allow the vendor to look more closely at acquisitions and be more agile as a private company.

“It was going to be tough for [Thomson Reuters] to achieve its full potential unless it went private and make more longer-term investment decisions,” says the source.

As industry analyst Hugh Stewart tells Waters, “a good dose of Blackstone’s private equity management style” will refresh the older management practices—and, some clients say, middle-management bloat—still held in parts of Thomson Financial and Reuters and “further improve financial performance and optimize the business.”

In fact, Blackstone has recently built an internal data group that aims to bring big data applications to the investment process while mining the firm’s own portfolio companies for data that has value both for Blackstone’s own investments and that could potentially add third-party market value, noted Blackstone COO Tony James during the firm’s earnings call on February 1.

“We’re big believers in data and that’s certainly a driver behind the Thomson Reuters business. The most valuable part of that business, by far, is the data part. The terminals are the legacy business for which people think of them, but that’s not where the future of the company is,” he said.

A fixed-income trader at a tier-one bank in New York said that if Thomson Reuters can expand its data offering even further, which is what the trader believes will happen, then the Blackstone piece will be a welcome addition. The source adds, though, that what people will care most about in the near-term is what happens to those companies and platforms that Thomson Reuters had previously bought or invested heavily in. As to what will happen to those units and products, “that’s anyone’s guess,” says the trader. 

The deal has also added some confusion for partners of Thomson Reuters. On the company’s earnings call for its full-year 2017 results, Adena Friedman, president of Nasdaq, said that they are still examining what this deal will mean for them.

“We’re just trying to make sure we understand the contours of that partnership that they’ve announced and understand the implications. Thomson Reuters is a great partner to us actually in the corporate solutions business and in our data business and we would certainly expect them to continue to serve those roles to us going forward, but we’re digesting the news at the same time you are right now,” she told the audience. 

Thomson Reuters declined to comment for this story. 

Most sources that spoke to Waters for this story indicated that Blackstone’s partnership was a much-needed jolt for Thomson Reuters. The Temenos–Fidessa deal is a bit different. 

Temenos is a major provider of core-banking technology, but has never had a front-office trading presence; by acquiring Fidessa, it gets a strong, mature sales pipeline and robust suite of proven solutions. Indeed, in documents accompanying the offer, Temenos made clear its intent to fuse its middle- and back-office software with the company’s front-office technology as part of the deal, given that Fidessa is a large order and execution management system (OEMS) provider. 

Sources say that for firms in the OEMS space, at a certain point companies have to diversify their business structure and enter into whole new spaces or become part of a bigger group. In this case, it was the latter. 

“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,” says an investment banker at a leading UK bank. “What we’re witnessing is a wholesale remodeling of the entire vendor sector at the moment.”

Spokespeople for Fidessa and Temenos did not respond to requests for comment.

Navigating New Waters 

Beyond what we’ve already seen in 2018, the vendor space has undergone extraordinary consolidation in recent years. IHS merged with Markit in 2016. FIS bought SunGard in 2015 in a cash and stock deal. SS&C Technologies has been as active as anyone, gobbling up Advent in the same year for $2.3 billion, along with Varden Technologies and Primatics Financial, then Wells Fargo’s and Citi’s fund admin businesses in 2016, making it the world’s largest fund administrator following its 2012 acquisition of GlobeOp. FactSet bought Portware in 2015 and Bisam Technologies in 2017, along with Vermilion Software and Cymba Technologies in 2016, as well as Interactive Data’s Managed Solutions Business in 2017, after the parent company was acquired by the Intercontinental Exchange Group. Centerbridge Partners bought IPC Systems from private equity firm Silver Lake Partners for $1.2 billion in 2014. Perhaps most notably, Misys and D+H Financial Technologies merged to become Finastra in 2017, creating one of the world’s largest financial technology firms, with $2.1 billion in annual revenue. 

Many of those listed above that were acquired were the acquirers of companies not too long ago. But the market landscape has changed. The UK investment banker says that, increasingly, established technology vendors have come under pressure as their clients have dialed back spending, either due to a focus on regulatory projects or due to a general realignment in strategy as the sector shakes off the last of its hangover from the global financial crisis.

“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 the source. “Now the banks are pulling back on the number of third-party vendors they’re using for a number of reasons—cybersecurity, 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.”

And as these big mergers happen, it puts pressure on other larger companies to find partners, which can lead to the mid-sized vendors getting squeezed out of the market. One CTO at a large New York-based hedge fund says the industry’s move to cloud-based technologies has added to the number of mergers because cloud has helped to alleviate some of the fear that previously existed over vendor lock-in. Rather, the greatest concern after large acquisitions is talent drain and management direction. “Managing the staff is the most challenging—if people start leaving then you have to worry,” says the CTO.

While each acquisition offers the opportunity to both bring in new blood and trim some organizational fat, it’s a tricky sea to navigate. Consider that, as noted before, Temenos is headquartered in Switzerland and its focus is on core-banking systems. Fidessa is a darling of the London technology scene, listed on the London Stock Exchange, and focuses on trading platforms and compliance software. Thomson Reuters is a massive technology company; Blackstone is a sprawling private equity and investment firm. Even Blackstone’s Tony Scott, while speaking on that earnings call, noted that there will be cultural issues to overcome.

“I think this is a journey that we’re just beginning and while we’ve got a team, it will take more investment in the team, it will take somewhat of a cultural change, it will take education around our people,” he said. 

That’s the nature of business, in some ways: Everyone worries about the technology and the share price, forgetting that it was a team of people that helped to create a successful business.

Tea Leaves

In Blackstone’s earnings call, which was held days after the Thomson Reuters announcement, Stephen Schwarzman, Blackstone’s co-founder, chairman and CEO, said that he expects to see “other large transactions” in 2018, but cautioned against being too exuberant in predictions of a bull run in consolidation. “The debt markets are very liquid—very robust—interest rates are low. … So I think there will be some other big deals, but I don’t think there will be a wave of them. The industry has changed. [Limited partners] are becoming increasingly interested in side-by-side and co-investments, and they’ve become increasingly capable of making the decision with you almost as a partner or co-sponsor from the get-go. That is here to stay, in my opinion.”

So is this current iteration of consolidation the new norm, or will the Big Crunch lead to a Big Bounce where new entrants will be able to find green field in the middle to grow organically? Looking at the broader retail tech landscape, it might hint toward a combination of the two, as the likes of Apple, Alphabet, Microsoft, Facebook, IBM and Oracle, to name a few, dominate most of our everyday lives and increasingly seek entrance into new markets—in some instances, asset management and the capital markets. When innovative startups come along, they often get swooped up before they, themselves, can become the next Facebook or Google. And that’s fine, so long as monopolies don’t develop and the end consumer doesn’t end up suffering from inferior service or price gouging. 

One question you might want to ask yourself, though, is this: In 1982 the Bloomberg Terminal was released to the market and eventually grew to dominate the financial markets—can that happen again? 

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