Firms Eye Tech Acquisitions

Bolstered by record profits in 2005, the securities industry may see an increase in consolidation activity in 2006, according to Robert Hegarty, managing director in TowerGroup's securities and investments practice. Both smaller financial firms and innovative industry-specific technology providers will be on the menu for many bulge-bracket firms in the coming year, he says.

Q: What is your take on Lehman Brothers' recent acquisition of Townsend Analytics?

A: It is positioning Lehman Brothers to further take advantage of electronic trading. Lehman has made quite a bit of progress over the past 18 months to become a very strong player in the equities markets. ... We have seen this trend before -- where institutions go out and acquire technology vendor firms when they think the technology can add value to their business.

Q: Does the move signify the beginning of a consolidation trend?

A: This is a trend that has already begun -- this acquisition by Lehman Brothers follows Citi's acquisition of Lava. We see a similar pattern where institutions see unique vendors and they acquire them. ... I think that certain financial technology vendors are very attractive right now, and we may see more of this.

Q: Will we see a higher-than-normal number of acquisitions in 2006?

A: I do think we will see that. The financial firms are very healthy financially, and we have seen a number of strong earnings reports in the last couple of months. They have cash on hand, and they believe they are buffeted by a strong economy.

Q: When we look back on 2006, what will we remember most from this year?

A: Well, it's been an absolutely wild ride over the last few years, and it has been very disruptive. In 2006, we will start to see a lot of the disruptive deals and technology come into play, ... and they [will help] in terms of really growing the business. We will see an enormous amount of electronic trading. ... We have seen a lot in the past, but we haven't seen the [share volume] increases that people have expected. ... We have seen share volume remain fairly flat ... essentially since 2001. But what people forget is that trade volumes have quadrupled. In 2006, we are set to see quite an increase in [share] volume, and that could put a strain on the [industry's] infrastructures.

Q: What other trends will shape the financial markets in 2006?

A: One [trend] is the use of nontraditional asset classes, such as derivatives. This is being driven by the investment community as they search for alpha.

Q: Does the industry, in general, have the technology in place that is required to adequately transact newer investment classes?

A: No, honestly. We are fairly unprepared as an industry, [though] there are firms that are well-prepared. ... And in terms of preparation, there is a lack of qualified people who have the knowledge of [alternative investments] who can support these systems. These are complex products that require financial knowledge about the markets and the financial instruments themselves. ... Combine that with the technical knowledge that is required, and you have a very limited pool of [qualified] people [to choose from]. ...

However, I wouldn't say we are dangerously unprepared. But the downside of not being prepared is that we are not going to be able to take advantage of some of these alternative investments as well as we could [if the technology were ready].

Podcast:
To hear this interview in its entirety, go to: www.wallstreetandtech.com/podcast Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio