Source: Finextra Research
SunGard's unofficial role as an incubator for software companies in the financial technology sector is not over just yet.
The proposed $11.3 billion takeover of SunGard by a consortium of private equity firms has led to much panicky speculation among the fintech chattering classes about the company's future acquisition strategy. Borne from a leveraged buyout of two unrelated companies in the early 1980s, SunGard has grown its business by stitching together more than 100 technology acquisitions. As organic growth stalled in the first half of this decade, SunGard picked up the pace, snapping up under-valued competitors and moving into new business areas.
The announcement in October that SunGard was planning to spin-off its Availability Services business was the first intimation that the company was catching its breath and looking seriously at its future strategy. In financial services, SunGard had already begun to re-organise its diverse business streams into four distinct segments, encompassing Trading, Treasury & Risk Management, Institutional Asset Management & Securities Servicing, Wealth Management & Brokerage Operations and Benefit Administration & Insurance.
In many ways, the plans read like a blueprint for a later stage break-up, designed to maximise the synergistic benefits of previous acquisitions, quickly identify and plug gaps in coverage and re-present to investors as a coherent and cohesive business programme. It was this effort which piqued the interest of well-funded West Coast buyout firms.
Silver Lake Partners, the lead investor in the SunGard buyout, made its name with the $2.2 billion takeover of computer disk drive maker Seagate Technology in November 2000. The sponsors ultimately made five times their money when the company went public again in December 2002. Clearly, Silver Lake and its partners have identified similar opportunities for adding value at SunGard.
Silver Lake's Glenn Hutchins says that SunGard will be better equipped to continue its expansion plans under new ownership, as management are freed from Wall Street's obsession with short term earnings.
"We intend to accelerate the growth by investing both internally and continuing to invest in acquisitions," he says.
SunGard CEO Chris Conde is enthusiastic about the prospects. "This deal isn't predicated on breakups or on cutting costs or on lessening service levels for our customers," he says. "It's all about growth."
Ultimately the loose ends will be tied up and the group will be repackaged and parceled off with a minimum burden of regulatory oversight and at a healthy premium. But in the interim - for the next 12-18 months at least - SunGard will remain in the markets as a buyer rather than as a seller of businesses.
As it is, the buyout tells us less about SunGard's progress, and more about the powerful forces shaping the world of private equity. Record low interest rates and war chests swelled by institutional funds seeking better returns than those available in the public markets has allowed private equity firms to stake out bigger prey. Already, SunGard's status as the second-largest leveraged buy out in history is under threat from the proposed sell-off of Italian wireless carrier Wind.
With the public markets clearly undervaluing strong cash generative IT businesses, the private equity model provides a ready alternative for companies looking to realise their true value. Makes you wonder who will be next to attract the attention of the funds. Mike Bloomberg, for one, must be suffocating under the weight of prospectuses. But then, there's nothing new in that.
Our tip? Keep an eye on Misys and its sprawling healthcare-to-wholesale banking business. At just over £2 a pop, there's plenty of room in the share price for an improved return as a private enterprise.