Mergers sometimes don't add the value investors or customers expect. Is the acquisition of Algo by IBM one such an example?
In The News
In the news today, it has been reported that Algo will be acquired by IBM.
"According to a recent IBM Institute of Business Value survey of 1,900 global CFOs, nearly half indicated that their finance organizations are not effective in the areas of strategy, information integration, risk and opportunity management ..." Algorithmics Press Release | 1st Sep 2011
There are lots of questions which come to mind but as an avid supporter of Algo products, it is difficult to see a positive side to this merger from Algo's corner. One is left kind of feeling that this corporate action is akin to Kentucky Fried Chicken buying Sungard, so that KFC can sell the Adaptiv counterparty risk suite. I know someone is going to hassle me for that statement but that is the first thought that comes forward.
Alorithmics has had an interesting history; launched in 1989 it specialized in providing risk tools for the finance industry with a focus on exposure quantification however Algo really cut its teeth in the Basel II domain. It was seen as one provider out of only a handful that was able to bridge the technology gap for banks that were either trying to improve their credit risk systems or kick start their Asset Liability Management programs. In 2005 Algo was acquired by the Fitch Group, an interesting, perhaps dark move which if positioned well could have hooked Algo very deeply into credit analytics and the rating game however, that obviously wasn't to be.
Other sentiments that come to mind from today's news include some of the following:
[1] Why did Fitch let go of Algo? What really went on or is this just a nice cut our position and trade this out to lock in those profits - For those that don't know, Algo was bought by Fitch for $175 million and sold to IBM for a tidy $387 million. That is more than double your money in capital growth and in a matter of only six years, costs aside of course. Perhaps the time really had come for an exit strategy.
Perhaps rating agencies and software companies don't really work at all when married together, although the Fitch-Algo partnership is not unique. Back in 2008 Fermat (another wonderful risk software business) was bought by Moody's and between Fitch and Moody's, there really was an interesting play going on.
None the less Fermat is still with Moody's and Algo is free.
[2] What next? Is Algo and IBM a match made in heaven? It might be for IBM but for Algo, the fun is likely to come out of the game, time will tell.
[3] From the other side, IBM is certainly moving squarely into the risk domain with Algo. Are they up for the challenge?
International Business Machines Corp. (IBM) has agreed to buy Algorithmics, a supplier of risk analytics software, for $387 million. The purchase will add 900 employees to IBM's team of more than 8,000 consultants in the business analytics unit, Armonk, New York based IBM said in a statement today. Algorithmics, based in Toronto, is a member of Fitch Group, which is majority owned by Paris-Based holding company Fimalac (FIM) SA. Bloomberg | 1st Sep 2011I haven't been to the Algo website for a while so I thought it would be grand to give it a twirl. Mostly I wanted to see if there was anymore information on this wondrous development. As the webpage refreshed, I was presented with this image of a train falling out of the sky. Good one guys, very apt indeed and the caption "Unintended Consequences" is equally ironical.
There are lots of questions which come to mind but as an avid supporter of Algo products, it is difficult to see a positive side to this merger from Algo's corner. One is left kind of feeling that this corporate action is akin to Kentucky Fried Chicken buying Sungard, so that KFC can sell the Adaptiv counterparty risk suite. I know someone is going to hassle me for that statement but that is the first thought that comes forward.
"Combining Algorithmics' expertise with IBM's deep analytics portfolio will allow clients to take a more holistic approach to managing risk and responding to economic change across their enterprises ... " Rob Ashe general manager | IBM
"It is expected that Algorithmics' risk analytics software and services will be combined with the OpenPages suite of applications acquired by IBM in September last year ... " Finextra | 1st Sep 2011Oh my gosh pass me a bucket, I think I am going to bring up my breakfast. OpenPages, OpenPages come on, that is um, risk for dummies meeting one of the best kids on the block. So from a capability perspective who is the real winner here, IBM or Algo? --- There might be hope for OpenPages yet!
Alorithmics has had an interesting history; launched in 1989 it specialized in providing risk tools for the finance industry with a focus on exposure quantification however Algo really cut its teeth in the Basel II domain. It was seen as one provider out of only a handful that was able to bridge the technology gap for banks that were either trying to improve their credit risk systems or kick start their Asset Liability Management programs. In 2005 Algo was acquired by the Fitch Group, an interesting, perhaps dark move which if positioned well could have hooked Algo very deeply into credit analytics and the rating game however, that obviously wasn't to be.
Other sentiments that come to mind from today's news include some of the following:
[1] Why did Fitch let go of Algo? What really went on or is this just a nice cut our position and trade this out to lock in those profits - For those that don't know, Algo was bought by Fitch for $175 million and sold to IBM for a tidy $387 million. That is more than double your money in capital growth and in a matter of only six years, costs aside of course. Perhaps the time really had come for an exit strategy.
Perhaps rating agencies and software companies don't really work at all when married together, although the Fitch-Algo partnership is not unique. Back in 2008 Fermat (another wonderful risk software business) was bought by Moody's and between Fitch and Moody's, there really was an interesting play going on.
None the less Fermat is still with Moody's and Algo is free.
[2] What next? Is Algo and IBM a match made in heaven? It might be for IBM but for Algo, the fun is likely to come out of the game, time will tell.
[3] From the other side, IBM is certainly moving squarely into the risk domain with Algo. Are they up for the challenge?
I have this fear that the cost of implementing algo products is going to rise. Can you buy the tools without the implementation team?
ReplyDeleteHmmm, how is IBM going to get past their political master, the CIO to the CFO on this one? Finance departments may have something to say about this given IT's inability to support the "gold standard" data needs of finance.
ReplyDeleteIBM may not have the sufficient insight or understanding and appropriate skill set to tackle the hardcore Risk Mgt for IBs. Pretty much offer the high level general risk mgt to enterprises and hoping to synergize into a better suite of application with the takeover of Algo.
ReplyDeleteIBM provides the technology and Algo to provide risk knowledge and skill set. Doubt if this will work out in the long term.
For those that don't know, Algo was bought by Fitch for $175 million and sold to IBM for a tidy $387 million.
ReplyDeleteI checked your figures because I didn’t believe they were correct but you're right!!! IBM paid too much for this.
hi guys, not sure if I would agree with some of your comments. To be accurate, it is NEW IBM vs old IBM who acquired Algo, couple of years, I heard some comments when IBM acquired Cognos, hoping Cognos would teach IBM on business analytics, well, now it is Cognos who actually own Algo. Also, Algo was bought at a little over two times revenue multiplier compared with usual range of 3~4, not to mention HP's 10 times Autonomic deal. Someone mentioned about IT's inability on data, well, we all know the garbage in and garbage out, that is where IBM's traditional capability plays in. Plus, the compliance environment is getting complicated, so GRC tool like OpenPages does have synergy with Algo, e.g. OpVar, etc. Finally, Cognos cares about reporting, risk attributions will be seen across functions, etc. Bottom line is that a canned solution will be not sufficient in the future, it has to be viewed in a holistic picture both business and IT. But I would agree, there is always a gap between vision and reality, not to mention that complexity that is hard to be grasped by people who are comfortable in one domain...
ReplyDeleteDear Martin,
ReplyDeleteAs a Financial Risk specialist (I'm not sure what 'Causal Capital' does) let me 1st point out that comparing Moody's acquisition of Fermat, with Fitch's acquisition of Algo, is comparing the proverbial Apples to Oranges. Fermat is aligned with erstwhile Moody's KMV to bridge an offerings gap (now jointly called Moody's Anaytics), and Moody's smartly enough (unlike FITCH) did not try to get Algo married to the Rating Agency business. Fitch, therefore, had to "bring up" like the way you say their big lunch. They couldn't digest it.
IBM, on the other hand, I believe, are looking at the Group Risk intitiatives of larger banks, including Basel III, where Traded Credit and Counterparty Risk come together... I'll leave you construct the rest... methodology, pricing functions, data integration.... got the hint?
Guys,
ReplyDeleteSorry for the late posting on these comments, for some unknown reason they sat in the queue. Both comments are interesting and well informed thanks for posting.
I would definitely agree with “IBM, on the other hand, I believe, are looking at the Group Risk initiatives of larger banks, including Basel III” and we got hint – “ I'll leave you construct the rest... methodology, pricing functions, data integration.... got the hint?”