Some companies execute smart, strategic acquisitions better than others. Here’s a short list of publicly-traded FinTech & Info Services companies that do M&A well: CoStar Group (tkr: CSGP), Intercontinental Exchange (tkr: ICE), IHS Markit (tkr: INFO) SS&C Technologies (tkr: SSNC) and Verisk (tkr: VRSK). Click Here for Revenue, EBITDA and related metrics.
We love FinTech & Tech-Enabled Services companies that use acquisitions as a strategic lever. Many of the companies that compete in these sectors generate healthy EBITDA and Operating Cash Flow, often with EBITDA margins north of 35-40%. Institutional investors don’t pay company management teams to hoard cash. Therefore, we favor companies that invest in growth (organic and inorganic) and/or return capital to shareholders (we prefer dividends to share repurchases, see our previous writings on the subject HERE and HERE).
Let’s explore how each company expanded its product portfolio through M&A.
CoStar Group, (tkr: CSGP): We first met CoStar in 2007. The company is the 800-pound gorilla of Commercial Real Estate (“CRE”) data, analytics and workflow. More recently CoStar has moved into adjacent markets such as multi-family listings and related marketing services. CoStar has the currency ($13.9 billion Enterprise Value) and strength of balance sheet to pursue essentially any real estate-related Technology company acquisition. Founder CEO Andy Florance has been at it since 1987 and knows the CRE market as well as anyone. Let’s review a few strategic acquisitions.
- ForRent: CSGP acquired in February 2018 for a purchase price of approximately $376 million. ForRent is primarily a digital advertising platform for multi-family properties. CoStar entered the multi-family listings space a few years earlier with the acquisition of Apartments.com.
- NCI/ Apartment Finder: acquired in June 2015 for a purchase price of approximately $173 million. Apartment Finder provides lead generation, advertising, and Internet marketing solutions to property managers and owners.
- Apartments.com: CoStar acquired for $585 million in March 2014. Apartments.com – a listing service for renters, property managers and owners – gave CoStar a substantial footprint in an adjacent market. The acquisition added approximately $86 million and $28 million of trailing Revenue and EBITDA respectively to a Revenue and EBITDA base of $441 million and $137 million at that time.
- LoopNet: CSGP acquired LoopNet in April 2012 for approximately $883 million. We won’t rehash the public drama around this long-gestating deal. Standalone LoopNet was a lower-end version of CoStar’s platform where the former’s platform was primarily sold to individual CRE brokers rather than at the firm level. LoopNet operated over a public Internet protocol as compared to CoStar’s closed network. Further, where CoStar’s data was cleansed and published by the firm’s research team, LoopNet’s CRE data/listings were user-generated which resulted in higher EBITDA margins albeit without the rigorous data quality controls that were standard operating procedure at CoStar. CoStar released a fully-integrated version of the combined platform in 2017.
- Prospective acquisitions: deals that would make sense at the appropriate valuation include property management software companies Yardi (pvt.), RealPage (tkr: RP) and real estate portfolio accounting company MRI Software (pvt).
Intercontinental Exchange, (tkr: ICE): ICE has options on the M&A front. The firm plays across front, middle and back office operations and is best known for operating financial exchanges across geographies that trade various security types. ICE’s roots are in OTC Energy & Energy futures. ICE’s 2013 acquisition of NYSE Euronext was the firm’s highest profile acquisition. Our favorite acquisition was ICE’s 2015 purchase of market data provider Interactive Data Corp. (“IDC”) for $5.6 billion. Where exchanges are subject to trading volatility, data businesses such as IDC are predictable given their recurring revenue models, high customer renewal rates and predictable operating cash flow growth which provides the means for future product investment and acquisitions.
- MERS: ICE closed the MERS (“Mortgage Electronic Registrations Systems”) transaction in October 2018 after acquiring a majority stake in 2016. Purchase price was not disclosed. MERS is non-material to revenue and earnings but could prove to be highly strategic. The MERS System is a national electronic registry that tracks the changes in servicing rights and beneficial ownership interests in U.S.-based mortgage loans. The bet is that as mortgage processes migrate from paper to digital the MERS/ICE platform will be well-positioned to capture a significant piece of those digital workflows. MERS’ legacy infrastructure has since been migrated to ICE data centers which have the requisite capacity to handle large transaction volumes and data stores.
- TMC Bonds: ICE acquired fixed income marketplace TMC Bonds for $685 million in May 2018. This was after ICE acquired Virtu Financial’s (tkr: VIRT) bond trading platform (“BondPoint“), in January 2018 for $400 million. The two acquisitions enable ICE to better compete with large fixed income marketplaces such as Tradeweb and MarketAxess (tkr: MKTX).
- Chicago Stock Exchange (CSE): ICE acquired CHX Holdings, the CSE’s parent company in July 2018 for approximately $70 million (per the Wall Street Journal, terms were not disclosed by ICE).
- IDC: ICE acquired IDC on December 14th 2015 for a $5.6 billion purchase price. IDC is our favorite acquisition to date for the reasons articulated in the ICE lead paragraph. The firm provides market data to banks, asset managers and hedge funds and is probably best known for its securities pricing products. At the time IDC was owned by private equity firms Silver Lake and Warburg Pincus.
- NYSE: Perhaps ICE’s most high-profile deal – the firm acquired NYSE Euronext in November 2013 for $11.1 billion cash and stock.
- Prospective acquisitions: depending upon which strategic direction ICE wishes to pursue, there are a number of potential targets particularly as it relates to FinTech and Info Services. One could make a case for ICE to acquire several companies on this list as well as dozens of other prospective targets.
IHS Markit, (tkr: INFO): We first met IHS in 2008. IHS Markit was created by the 2016 combination of IHS – primarily a supplier of data, analytics and workflow to the Energy, Automotive, Maritime and Defense industries and Markit – a FinTech provider which sold its data products to banks, hedge funds, asset managers, regulators, auditors, fund administrators and insurance companies. IHS had an excellent M&A track record primarily driven by former Chairman and CEO Jerre Stead who was the catalyst for the IHS Markit combination. The combined company is today led by Markit founder & CEO Lance Uggla. Under Uggla, INFO’s M&A execution pace has continued. Below are several strategic M&A transaction that we like outside of the IHS Markit combination.
- Ipreo: IHS Markit acquired Ipreo, a U.S.- based Fintech provider – in August 2018 for $1.9 billion. Ipreo also had grown through a combination of organic growth and acquisitions. Ipreo will further strengthen the core Markit business which competes with a variety of Fintech firms including Bloomberg, FactSet, Thomson Reuters, SS&C and AcadiaSoft/ State Street Bank.
- automotiveMastermind (“aM”): INFO acquired aM in September 2017 for approximately $600 million. aM is a leading provider of predictive analytics and marketing automation software for the automotive industry. This deal will complement the R.L. Polk acquisition and will help INFO to compete more effectively against Cox Automotive and CDK (tkr: CDK).
- R.L. Polk (“Carfax“, a strategic IHS deal): IHS acquired Carfax in July 2013 for $1.4 billion. Carfax is the leading consumer-facing Automotive information services provider. A highly strategic deal that we prefer to Cox Automotive’s DealerTrack and Kelly Blue Book (KBB) acquisitions as we believe vehicle history is more valuable than a Dealer Management System (“DMS”, i.e. DealerTrack) or proprietary pricing/valuation algorithms (pricing algos in large part are driven by vehicle history).
- Prospective acquisitions: the list is long across Energy, FinTech, AutoTech and InsurTech. Both vertical assets as well as horizontal. Our advice (same holds true for all acquirers) would be to acquire companies that move the revenue and EBITDA needle. Smaller deals take just as long if not longer to close than larger deals as larger companies typically have internal processes that make it easier for prospective acquirers to perform due diligence. Target examples include FactSet (tkr: FDS), Solera (pvt.), CDK Global (tkr: CDK) and MarketAxess (tkr: MKTX). We would like to see IHS Markit get aggressive within FinTech.
SS&C Technologies, (tkr: SSNC): We first formally met SS&C in 2009 although we had exposure to the company as prospective users in 1997. Founder, CEO Bill Stone and his team are expert in the Portfolio Accounting, Back Office/ Middle Office Financial Services operations space having pioneered it with the company’s founding in 1986. Some 33 years later the company is driving innovation with a new, unique, comprehensive investment operations and accounting platform dubbed “Singularity”- which natively incorporates Artificial Intelligence (“AI”), Machine Learning (“ML”) and Robotic Process Automation (“RPA”).
SS&C has grown significantly over the past several years largely through acquisitions (CY’19 mid-point revenues are $4.74 billion, up from $1.68 billion reported revenue for CY’17). There are real tangible benefits to this type of scale – particularly in heavily regulated industries such as Financial Services where the reporting requirements are numerous, complex and expensive to comply with. SS&C’s scale, strength of balance sheet and domain expertise translates to a sustainable competitive advantage that few FinTech companies can match. Further, SS&C’s scale means that if you are a Financial Services back office or middle office professional with a business need, SS&C likely has technology capability to solve your business problem. In addition, SSNC can deliver that service in a number of ways including on-premise, hosting/SaaS/cloud, component outsourcing, co-sourcing, and full middle and back office outsourcing.
SS&C is as busy as any company on the M&A front. One of the operating principles that makes SS&C successful is the company’s decentralized operating model whereby the various business unit heads are accountable for driving output. Therefore, they have significant discretion as it relates to product development strategy, go-to-market strategy and M&A strategy (see our earlier piece: “Centralized Operating Models Don’t Work“). Let’s review a few SS&C acquisitions.
- DST: SS&C acquired DST for $5.4 billion in 2018. We refer to this type of deal as a “scale” acquisition in that it combines two companies that largely play in the same space. The combined SS&C DST is the largest SaaS provider to the retirement industry with more than 7.2 million participants. The combined company counts 23 of the 25 largest asset managers as customers. In addition, DST’s data centers provide SS&C with the capacity to take on substantially more co-sourcing and outsourcing business – a strategic lever and sustainable competitive advantage. Further, excess capacity could be offered as a commercial infrastructure service (“IaaS”) similar to AWS. We expect SS&C to win more than its fair share of co-sourcing and outsourcing deals as it rolls out Singularity. Further, DST’s Healthcare business – specifically its pharmacy solutions capability – provides SS&C with a beachhead into one of the largest sectors of the economy – Healthcare. You may read our Healthcare IT piece which focuses on EMR technology HERE. McKesson is one of the larger pharmacy technology companies having achieved this status through a series of acquisitions beginning a dozen years ago with companies like Per Se led by Phil Pead. We also expect Amazon to be a significant player in the pharmacy technology space with its recent $1 billion acquisition of Boston-based PillPack combined with its JV effort with JP Morgan and Berkshire Hathaway. We can foresee a time when Amazon offers full pharmacy capability as an extension of its Whole Foods operation.
- Intralinks: 2018 was a busy M&A year for SS&C having acquired DST, Eze and Intralinks during the calendar year. SSNC acquired Intralinks for $1.5 billion and the company has broadened its footprint beyond virtual data rooms which was its focus when we first met Intralinks in 2008. Our wish would be for Intralinks to automate the M&A idea-generation process which today is largely manual. There’s a way to do so through a combination of corporate entity on-boarding (via data partnerships and/or acquisition) and a machine learning-based matching and notification engine. It’s the highest value opportunity as it relates to automating the M&A lifecycle. Contact us if you wish to learn more.
- Eze Software: SS&C acquired Eze from TPG Capital in 2018 for a $1.45 billion purchase price (13.8x FY’17 EBITDA and 10.7x run-rate synergies of $30 million). Eze was another company we first met during the 2008 downturn when it was part of BNY ConvergEx led by Joe Velli. Eze became an independent company again a few years later and generated 2017 revenue and Adjusted EBITDA of $280 million and $105 million. Eze’s order management (“OMS”), execution management (“EMS”) platform is used by hedge funds, long-only and various other asset managers. There are numerous OMS/EMS platforms, far fewer remain independent as compared to a decade ago. Two of the larger OEMS platforms include Bloomberg and CRD (State Street Bank acquired CRD for $2.6 billion in July 2018). SS&C will be able to leverage its long-only asset manager relationships to expand Eze’s adoption in this market.
- Advent Software: Advent is a high-quality investment management/ portfolio accounting and reporting platform founded by Stephanie DeMarco that today is led by Rob Roley. SS&C acquired Advent for $2.7 billion in 2015. Today this business unit boasts more than 4,000 buy-side clients with high-90’s renewal rates.
- GlobeOp: SS&C acquired GlobeOp for $789 million in 2012. GlobeOp provides middle and back office services and risk-reporting to hedge funds, asset managers and other financial services customer cohorts. GlobeOp is the leading fund administrator with more than $1.6 Trillion in alternative Assets Under Administration (“AUA”).
Verisk, (tkr: VRSK): Verisk is the most prolific acquirer on this list. The firm acquired 6 companies in 2016, 18 companies in 2017 and and 3 during 2018. Below we look at several examples.
- Validus: On June 20th 2018 Verisk acquired Validus for a purchase price of $46.1 million. Validus develops claims management solutions as well as verify – a U.K.-based subrogation portal. Validus’ verify platform has been integrated with Verisk’s global claims analytic services and enables insurers to leverage advanced analytics and tools to automate and improve the claims settlement process.
- G2: Verisk acquired G2 Web Services (“G2”), a provider of merchant risk intelligence solutions for acquirers, commercial banks, and other payment system providers, for a purchase price of $112 million on August 3rd, 2017. G2 provides solutions that help fight fraud, transaction laundering, and reputational risk within the global payments and e-commerce sector. Our perspective is that the Financial Services segment is where Verisk will face the most competition, particularly within areas such as where G2 plays which are highly fluid in terms of the pace of technological innovation. Stripe and Signifyd for example are two leading FinTech companies that have strong e-commerce fraud detection offerings.
- Sequel: Verisk acquired Sequel Business Solutions (“Sequel”) for $320.3 million on August 23rd 2017. U.K.-based Sequel is a provider of commercial and specialty insurance and reinsurance software. Sequel enhances Verisk’s offerings to the commercial and specialty insurance industry.
- Prospective acquisitions: We would expect Verisk to acquire technology capability in the CyberSecurity space as well as in the machine learning area given Verisk’s recent focus in these two strategic areas.
The below graphic depicts Verisk’s customer end markets.
Verisk recently reorganized its business units into the following three segments: 1.) Verisk Insurance, 2.) Verisk Energy & Specialized Markets and 3.) Verisk Financial Services.
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