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M&A expert Ken Marlin, CEO and founder of Marlin & Associates, talks to IRD about how the proposed Reuters–Thomson merger took him by surprise and why the market is seeing increased interest from private equity firms in the data management space.

How have you seen the market develop in terms of consolidation over the past three years?
We have seen lots of merger and acquisition activity, and I expect that to continue. But, to me, the word "consolidation" implies that we are soon going to come down to two or three companies in the field. I hear people talking about consolidation, but it never seems like there are fewer companies at the SIA show. In fact, it seems as if there are constantly new companies and niches emerging. In information management, for example, there are companies such as GoldenSource and Asset Control, but they only cover a small part of what goes on in the back office of a bank. What they do is different from what Eagle and Netik do, and what Eagle and Netik do is different from what Information Mosaic and XSP do. I don't believe information management is going to come down to three companies any time soon.

What do you make of the proposed Reuters–Thomson merger?
It's great. Markets evolve, companies evolve. But I admit Reuters and Thomson caught me by surprise. Sometimes you think companies are simply too big to merge. You have to give [Reuters CEO] Tom Glocer and Geoff Beattie [expected to become joint–deputy chairman of Thomson–Reuters] a lot of credit.

Do you think their merger will be approved?
Yes. I think Reuters and Thomson largely have complementary strengths except for some small areas. And numerous firms compete with them in all areas of significance. Reuters' strength has always been news and trading flow activity, while Thomson has evolved out of the research side of the business. It ought to make for a stronger company.

How do you think this will affect mergers and acquisitions in the financial technology market?
Reuters and Thomson both have historically been active acquirers. Long–term, that will probably continue. But, for the next year or two, I would expect the attention of Thomson/Reuters senior managers is going to be completely on integration issues. They may possibly sell some small pieces. The spin–off of TradeWeb has already been announced. But, I don't expect to see them as pro–active buyers anytime soon. But, there are plenty of other buyers in this market, so I don't expect the pace of M&A activity to slow. In fact, the merger may leave plenty of opportunity for other firms such as SunGard, S&P, Bloomberg, DST, FactSet, GL Trade, Interactive Data and a bunch of others.

Should we expect more consolidation in the coming years?
More merger activity, yes. As I said, at the trade shows, you don't see fewer firms. But its true that you also don't see many firms with $50m?200m in revenues—you see them smaller and you see them bigger. Eighty percent of fin tech firms we see are under $80 million in turnover. It seems many firms get up to around $50 million in sales and the owners realize the firm is worth a lot of money. That's when they call us.

When did you start seeing private equity (PE) firms interested in data management companies?
I've always seen private equity interested. Welsh, Carson, Anderson & Stowe invested in Bridge in 1995. Warburg Pincus, SilverLake, GA and TA Associates have also long been interested in this space. But, it is true that recently, we've started to see more private equity interest in this market.

Why?
Several reasons: First, financial tech firms, as other tech firms, can have great financial characteristics, once they reach scale. They can be very profitable with strong recurring revenue and have products that are hard to dislodge. Second, the PE firms have a huge amount of money and they are having trouble finding smart places to put it. This has caused some to look beyond their normal areas of comfort. Third, a number of these PE firms have begun to re–think how they value companies. Historically, many PE firms liked to buy a company for something like eight times cash flow; get debt leverage if they can; then grow it for a few years, maybe make a few acquisitions, then sell the company for around 10 times. That model may work for buying SunGard or Reuters but it doesn't work for the smaller financial tech firms. In this space, until firms reach scale, a lot of their cash flow typically has been invested in growth. So, eight times cash flow doesn't work as a valuation metric. And, for the smaller firms, there is not a lot of opportunity to use debt in the purchase price. In the past, PE firms have not known how to deal with that paradigm. But the stock market tends to value companies based on growth and a growing number of PE firms are valuing fin tech firms the same way.

What about venture capital firms investing in data management companies?
Same concept. Quite a few VC firms invested in fin tech firms in the past, and we see more coming into the space. We have advised several of these firms as they looked to exit.

Source: © Incisive Media Investments Ltd 2007