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Acquiring Minds

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Recently there have been a number of mergers and acquisitions among technology companies that are focused on serving the needs of advisors. Some advisors have wondered what this might mean for the long-term viability of their service providers, or whether they should be worried about doing business with smaller vendors or newer players in a particular field.

Significant value and wealth is created when companies successfully meet the technology needs of advisors. The financial services industry requires complex technology, which fosters the entrepreneurial spirit, and it frequently leads to more choices for advisors. Remember Techfi, an upstart portfolio management system that was acquired by Advent for approximately $23 million back in 2002? In this purchase, the Department of Justice actually investigated the transaction due to antitrust concerns. Nothing came of the investigation, but it did raise the concern that there were not enough companies serving the portfolio management reporting needs of advisors. However, look what ultimately happened: Investments came in to startups with an entrepreneurial spirit, such as Portfolio Director, Black Diamond and AssetBook, along with attempts by larger companies like Intuit. The capital and development work that quickly poured into this area was significant, and today advisors have more choices with better technology solutions available to meet their reporting needs. In addition, the concept of advisors “outsourcing” their reporting needs has also gained traction as a viable solution.

As we scan the landscape of technology companies focused on serving the needs of advisors, we see that many of these companies are generally small- to medium-sized organizations. Most are privately owned with likely a majority of the ownership held by their founders and other key executive management members. Given the trials and long hours that any new company experiences, it can certainly be a hard road to achieve consistent revenue results, let alone profitability. Therefore, it can be a “shot in the arm” for all technology companies serving advisors when a similar company is acquired at an attractive valuation. It is simply a quick validation that what they are doing is valuable. Whether the technology company has a desire to sell in the future doesn’t really matter. The confirmation of value alone should lead to continued innovation by technology companies on behalf of the advisors who are their customers. In addition, any change in ownership of a company provides new opportunity to compete for and win business—for both the acquired company and their competition.

In any new technology purchase, advisors should ask their provider what their ultimate exit strategy is. Are they going to sell? Stay independent? Merge with another firm? Raise more capital? These questions are particularly important when the technology company is relatively small and is experiencing rapid growth. They can’t predict the future, but at least you can understand the goals and objectives for their company. You might also want to determine if the answers to these questions are really important to your firm. As with any technology purchase, be sure that you understand your exit options if you need to switch to another solution. If you know of no viable competitors for a service you are dependent on, you have some homework to do. Finally, be ready for lots of speculation if one of the technology companies you use has a change of ownership. Of course there will be positive and negative comments, but what truly matters is how your experience improves or worsens—which is hard to predict in the early stages of an acquisition. However, one fact that I have noted about all mergers and acquisitions is that the acquirer never undertakes a transaction hoping that all of the target company’s customers just go away. If there is a need for a service, someone will want to provide that service and profit from it.

It is very rare for technology companies—even firms focused on serving advisors—to not experience some level of ownership change during their lifecycle. As it is often said, change is constant. For technology companies, change—or more specifically innovation—is not a choice, but a requirement to remain competitive.