Flush Firms Eye Acquisitions

Why It's Important: Consolidation always has been present in the financial markets, with big fish eating little fish to gain market share, scale or sometimes a new set of financial product offerings. Traditionally, as the large have gotten larger, the smaller firms have been forced to partner or to specialize in a specific product or offering (aka a boutique firm). Cash-rich financial firms, in order to gain a competitive advantage over rivals, also have a history of consuming innovative technology providers that Wall Street firms believe can provide value through unique technology or ultra-efficient processing. The technology "grabs" often lead to a run on other financial technology providers, as rival firms worry that they may lose out on innovative technology.

Where the Industry Is Now: Financially, 2005 was a good year for the Street. In fact, 2005 was a record year for many firms as previous all-time-high profit numbers were smashed. Last year, as in most years, consolidation was a topic both among financial services players as well as among financial players and technology vendors. Lehman Brothers acquired Townsend Analytics in December to bolster its execution management technology. Bank of New York acquired direct-market-access firm Sonic Financial Technologies in March, and JPMorgan bought privately held technology firm NeoVest in June. But Citigroup really kicked off the acquisition spree back in June 2004 with its purchase of Lava Trading for its direct-access electronic-trading software.

Focus in 2006: After a profitable 2005, many firms will have extra capital on hand in 2006, and some will be looking to make acquisitions -- of either smaller financial firms, or financial players that specialize in different investment classes (think hedge funds and alternative investments) or have a strong presence in sectors that could bolster the acquiring firm's overall investment offering. Also, expect to see innovative technology providers continue to be gobbled up by financial services companies as Wall Street looks to bolster the technology offerings that it provides clients. Lastly, the continued compliance grind may force smaller firms that don't have the capability to maintain robust compliance departments to look for partners or suitors.

Technology Providers: A merger or acquisition generally doesn't happen because of a technology advantage. Rather, in almost all cases, M&As are driven by a perceived business advantage. In almost all cases, however, the key to ensuring a successful merger falls, partly, on making sure that technology can integrate systems, data and processes. Most consultancies -- including BearingPoint, IBM, Deloitte and others -- can assist in managing the integration of two companies' systems. Likewise, financial-services-specific consultancies, such as Citisoft, also provide technology and management strategy guidance. BusinessEdge Solutions is a technology and consulting provider that helps companies make sense of their internal systems, ultimately helping a firm formulate a technology road map that could speed any integration and rationalizing of acquired technology systems.

The Price Tag: The cost of consolidation varies, depending on the types and sizes of financial firms. Although financial terms of the deal were not disclosed, analysts estimated that Citigroup's 2004 acquisition of Lava Trading, for example, was valued from $500 million to as much as $1 billion. Terms of other similar deals also were not disclosed, though analysts estimate similar price tags. Services from consulting companies and technology providers that can assist in rationalizing technology can run in the six-figure range, but vary depending on the size and complexity of an integration. 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