When Broadridge Financial Solutions announced at the end of March that it was buying Itiviti from Nordic Capital for $2.5 billion, the price tag caught some off guard. The fact that it was Broadridge acquiring the Swedish trading platform provider surprised others. But this is the way the market is moving: large banks, large exchanges, and large vendors are all trying to figure out how they can create their own front-to-back ecosystem for users. 

Banks used to say that they weren’t technology companies; now the biggest ones have innovation labs, fintech sandboxes, or venture capital arms. Exchanges were simply marketplaces; today they’re swallowing up major tech and data providers. And the largest vendors used to believe in closed-off systems; today, interoperability is becoming the name of the game. All of these shifts in mindset are being driven by the idea of front-to-back.

During an analyst call announcing the acquisition, Broadridge CEO Tim Gokey noted that “the front-end and back-end exist as two separate functions,” but Itiviti would help Broadridge to bridge that gap, allowing users to simplify their tech stack and operating models. In an interview with WatersTechnology, Vijay Mayadas, president of capital markets for Broadridge, says that the company already has a “strong footprint in the post-trade world,” and it does have front-office products—most notably through its acquisition of Paladyne Systems in September 2011—but Itiviti will allow Broadridge “to create a full front-to-back solution for capital markets firms.”

A strategy executive at a data and software solutions provider who has had experience working on the buy side says that while trading firms certainly want a more complete offering, rather than having to stitch together tools on their own, they prefer to see internally developed innovation, rather than innovation through acquisition.

“A lot of clients probably look at the way they’re using technology and want to see their providers listening to them to address their challenges,” says the executive. “They’ll say, ‘I need you to be developing the tool I already have from you to meet my requirements or my evolving business. I don’t necessarily want you to tack on a completely new system that covers something else. I want you to innovate in the space that I selected you for originally.’”

Achieving front-to-back integration takes time, and the devil is in the detail. Ion Group has had challenges integrating Fidessa; IBM wasn’t able to make its Algorithmics acquisition work in the long run. While the dream is to get to a true front-to-back offering, industry experts say it’s just that—a dream. 

“If you ask Broadridge and they talk about trade lifecycle, sure, it’s all beautifully said, but the front-office scene is very different from the back-office, and I just don’t see them being able to convince their back-office customers to start using their front-office tools, and vice versa,” says the former head of a trading platform provider. 

Still others say front-to-back can be achieved if the right strategy is put in place. The strategy executive says providers like SimCorp and BlackRock have succeeded in making a play for that front-to-back solution. “For SimCorp, it worked really well in certain target markets like Europe, where best-of-breed didn’t resonate so well due to the complexity of integration. They sort of put the fear of God into people that integrating systems is so hard,” the executive says.

BlackRock, on the other hand, “was going out to clients telling them, ‘Hey, you’ve got 10 or 15 different systems covering risk, portfolio management, compliance, trading, and reporting, and all these different things. We’re going to draw a box around that, and [BlackRock’s portfolio management platform] Aladdin is going to cover all those things,’” the executive adds. 

Marcus Consolini, partner at independent strategy consulting firm Quinlan & Associates, adds that M&A isn’t done in a bubble. Itiviti itself merged with buy-side trading technology provider Ullink in 2017, and it’s likely that the two are still working on integration projects. “I bet some of that integration is still going on,” he says. “You go down the layers and that’s quite intensive. But that’s what happens in an acquisition environment around technology—it’s not avoidable.”

A source familiar with Itiviti’s inner workings says that while front-to-back is the goal, this deal will also allow Broadridge to expand its global footprint, as Itiviti—especially thanks to the Ullink pairing—has a “reasonably complete” front-office operation in the Europe, Middle East, and Africa (Emea) and Asia-Pacific (APac) regions.

They add that when bolting on a new offering where there aren’t naturally existing synergies, integration projects tend to take a longer time. They draw parallels between this deal and what FIS Global is looking to do with its capital markets profile, most notably with its SunGard acquisition, and, to an extent, what Temenos and Finastra are doing in the core banking space.

“They have a long way to go, though, before being able to achieve those levels of integration, and in the short term, I don’t expect the clients of either business to feel the benefit of the buyout,” they say.

So it’s possible nothing will change for clients, and Itiviti will be left to run operations without much interference. “Itiviti has a clear and reasonably well-defined product development and strategic roadmap, and I expect them to stick to that plan. Integrating directly with Broadridge’s middle- and back-office technology doesn’t really fit that plan in the sense that it yields no overt, immediate benefits for either of the companies or their clients,” they add.

Idea factory

Broadridge’s Mayadas says although that integration roadmap is long and extensive, the top priority is to ensure clients have a seamless experience. “Mission number one is to ensure that the integration between the brokerage platforms and Itiviti’s platforms is as seamless as possible. Today, clients still do work integrating Itiviti into our equities platform. We want to make that process as simple as possible for our clients, and that’s step number one,” he says.

The aim is to have that process available to clients in a much more standardized, off-the-shelf integration than have the client orchestrate the process.

Mayadas says the firm has “a lot” of product ideas around front-to-back integration, and these ideas are driven by the market’s thirst for data. 

“If you think about large capital markets firms, they have lots of different types of databases, they have different sources of truth around transaction data, and they have to do a lot of reconciliation across all the different systems,” he says.

One idea—which Mayadas notes is a longer-term investment—is to create a common data warehouse that has one set way of describing transaction data and trade data, and all the different systems would be mapped into that way of describing trade data.

“So firms now have a single source of truth around their transactions and would be able to manage positions and transactions on a real-time, global basis. This is something Broadridge has been working with clients on for a while, but only in the post-trade world. The ability to now do that in front-to-back is very compelling,” he says.  

Another idea is to bring some of the functionality that historically has only existed in the post-trade world into the front office.

Mayadas says there is demand for firms to take certain datasets and calculations out of the back office and into the front office to drive a more real-time view of things such as risk, margin, settlement status, and so on. This need—and more importantly, want—is more pertinent in asset classes that are traded algorithmically and are highly electronified.

Exchange-traded derivatives (ETDs) and equities are examples of this. This is also where Itiviti comes into play. The company is known for three main things: its Nyfix network connectivity solution; its Tbricks exchange derivatives trading platform; and its order and execution management system (OEMS). About 60% of its 250 million revenue comes from the OEMS and Tbricks. The remainder comes from Nyfix.

In the ETD world, Mayadas says real-time information on margin, clearing status, and cash movements on an ETD trade is important. “Traders have been trying to figure out how to bring that data into the front office so they can make trading decisions in real time based on cash projections related to trades that will clear, and margin projections related to trades that will clear and settle,” he says.

That is one of many examples that Broadridge will be building out over time, he adds.  

Infrastructure is not sexy 

In November 2017, Itiviti merged with multi-asset trading technology and infrastructure provider Ullink. The marriage saw Ullink integrate its buy side-focused solutions with Itiviti’s portfolio of sell-side trading solutions. Ullink brought to the merged entity its Nyfix network connectivity, which it bought from the New York Stock Exchange in 2014. 

Together, they brought to the table high-touch, low-touch, market-making, and connectivity solutions. Itiviti’s OMS picked up new business thanks to Bloomberg sunsetting its sell-side execution and order management (Sseoms) business. 

Quinlan & Associates’ Consolini, who was formerly head of Asia at Ullink before the firm merged with Itiviti, believes Broadridge made a smart move.  

“They knew they were missing a very big part of this food chain—they were missing that EMS/OMS playground that gets so much attention. And the reason it gets attention is that it’s sexy. When you’re going out to clients, you want to talk about trading environment, you don’t really want to talk about the pipes. The pipes aren’t so sexy, but the pipes are fundamental,” he says.

The pipes are important as they connect the brokers and asset managers and exchanges worldwide, which were Ullink’s specialty, and which are now part of the whole Itiviti package.

Consolini says this is the bigger reason Broadridge made a move on Itiviti. “I think they’re looking at the infrastructure stuff because Itiviti is so infrastructure-focused. For example, a lot of their clients are literally exchanges, and that is because you’re building the gateways for the order flow and connectivity into the exchanges. So for Broadridge that will be great; they suddenly have access to these infrastructure clients, as well as a bigger and broader range of the broker-dealer and asset management space,” he says.

Although Nyfix contributes the smaller chunk of revenue to Itiviti—about 40%—sources believe this could be what Broadridge was really after.

Medan Gabbay, chief revenue officer at multi-asset OMS/EMS provider Quod Financial, believes that the Nyfix piece is “infinitely more valuable” to Broadridge than Itiviti’s OMS, as it’s a stickier product. 

Whether or not one Fix connectivity provider has a better product versus another certainly matters, but having critical mass matters more, which, Gabbay says, Itiviti has. “You need to have enough of a percentage of market value. … The Fix network globally is [Bloomberg’s] EMSX, [Refinitiv’s] Autex, followed by Nyfix, and then the only reason to use other Fix networks are because OMSs force it.” 

This all has to do with how Fix networks work, which Gabbay compares to how cloud technology works. It’s like a standard message that goes into the cloud, and then it connects with someone on the other side.

“Let’s say I have a buy-side client on Nyfix, and a broker on Nyfix. The broker will pay roughly $400 per month, per client, for that buy-side [client] to be able to see them over the Nyfix network. When that client sends an order, Nyfix will ask, ‘Who are you sending it to?’ and they’ll say, ‘Broker code A123,’ and the order will magically appear on the endpoints destined for A123,” Gabbay says.

If the broker is on a different network, but the buy-side client is on the Nyfix network, the client will send the order to Nyfix, and the broker will pay Nyfix $400 for the privilege of receiving that order. That order will then go on a connection between the Nyfix network and the secondary network—which will also charge the broker $400—for that broker to receive it, Gabbay says, thus doubling the cost for the broker. As a result, they’re more likely to just use Nyfix, EMSX, and/or Refinitiv. 

Perfect timing?

Beyond the front-to-back aspects of this deal, the price tag raised eyebrows for others. A former head of a trading platform provider says Broadridge paid “way too much” for Itiviti. Rumors began in October 2020 that Itiviti was up for sale. Back then, Bloomberg reported that Itiviti’s owner, private equity firm Nordic Capital, was considering selling it for some $1 billion. 

Broadridge’s $2.5 billion offer—valued at 10 times Itiviti’s recurring revenues of approximately €210 million (~$250 million) in 2020, according to Broadridge—has left some sources skeptical of the splurge.

“They plan to get $20 million revenue synergy in 2025. … How do they justify this as a lucrative deal? I have no idea,” says the source.

They say most deals of a similar caliber have been done at smaller multiples, but last year the cost of M&A has been trending upward.

“We used to see deals in the three- to five-times revenue multiple in the capital markets and fintech business, but somehow in the last year, the number has crept up. This one is 10 times, which is insane,” they say. 

For example, in July 2018, State Street announced it was acquiring Charles River Development for $2.6 billion, about 8.67 times CRD’s 2017 revenues of $300 million.

Also in July 2018, SS&C Technologies bought Boston-based OEMS provider Eze Software for $1.45 billion, valued at about five times Eze’s 2017 revenue of $280 million.

Though those acquisitions were mainly in the buy-side OMS space, some sources raised concerns that Broadridge spent so much on Itiviti, leaving less capital for Broadridge to innovate, much less spend on integrating Itiviti into its business.

Mayadas is adamant that the acquisition won’t affect Broadridge’s capability to innovate. “It’s an all-debt transaction, and obviously we got a very attractive rate because interest rates are so low. In no way is it going to impede our ability to invest organically because we invest organically from the P&L, and we continue to have capacity to do M&A,” he tells WatersTechnology.

He adds that Broadridge is very selective in its M&A targets and has a very disciplined approach. “We are very focused on tuck-in acquisitions that are synergistic with our product set. Itiviti was much more a transformative acquisition, a significant move into the front office, but we continue to have capacity to do our more standard kind of M&A deals,” he says.

As of its latest quarter earnings ended December 31, 2020, Broadridge has cash and cash equivalents of $365.6 million. Its current ratio—which measures a firm’s ability to meet short-term obligations—stands at 1.37.

And perhaps the sale was also due to good timing, Consolini says. 

“We know there’s now disassociation between the economic situation and the market situation. And we know that everybody’s trying to get real heavy emphasis in anything in the technology space because of what we’ve seen with the Covid-19 pandemic. The timing was perfect for them to get a premium in the marketplace. Is there logic around that pricing? Not by where I stand,” he says.

However, Consolini says, that doesn’t mean there wasn’t a logical argument that justified getting the sale over the line.

The Paladyne question

Broadridge’s acquisition of Itiviti is not its first foray into the front-office space. Back in September 2011, it bought buy-side solutions provider Paladyne Systems, whose integrated front-, middle-, and back-office platform served hedge funds, asset managers, fund administrators, and prime brokers.

However, since that acquisition, sources say they haven’t heard or seen Paladyne anywhere in the market. “Paladyne had a very early start to the buy-side OMS business and it’s literally nowhere to be found,” says a capital markets consultant.

The consultant stresses that Broadridge is not a technology company, but rather is a “processing company.”

“They contain the technology, but all they do is proxy and shareholder services. It’s a services business and they’re not known for cutting-edge technology. It remains to be seen how they will improve Itiviti,” the source says.

Several sources familiar with the Broadridge/Paladyne deal say it got off to a rough start, but not because Broadridge was under-investing in the buy-side specialist. 

Rather, it took some time to learn how the asset management community works.

At the time of the acquisition, which was for approximately $76.5 million, sources say Paladyne was pulling in about $20 million to $25 million in revenue. Considering this was Broadridge’s big breakthrough into the buy-side market, the sell-side giant viewed Paladyne as the right company to invest in, but hit a snag initially when it failed to renew contracts from big prime brokers, as Paladyne’s business was largely relationship-driven with prime brokers to drive order flow.

When Broadridge brought in Eric Bernstein to run its investment management solutions division, the vendor started to solidify its strategy on the buy side. 

“There will always be limitations of what you can do when you buy these companies for these high valuations in terms of what you can invest, but Bernstein’s vision is not to buy companies strictly for cash flow; the idea is to actually buy solutions to piece together to make better solutions,” says a senior executive at a vendor that focuses on the buy side. 

The executive says Broadridge always intended to invest in Paladyne and use it to build out its buy-side operations. The source contrasts Broadridge’s strategy with that of Ion Group, which, they say, “buys companies for cash flow.” And because Itiviti offers a “toll-keeper” business model where more transactions and connections equal more revenue (Nyfix), Broadridge will need to continue to invest in the connections and pipes that connect into hedge funds and asset managers.   

“It’s not selling pure software and seats; it’s actually selling trade volumes through its whole Fix connectivity business,” they say. “For Broadridge on the asset management side, [the Itiviti deal] is moving them from selling just pure seats to people, to actually getting some variable revenue components depending on transaction volumes. If you provide better service and connections, and if you can increase the trading volumes through these pipes, you make more money—you just need to increase flow. But to do that, you do need to invest in innovation.”

The source says they believe Bernstein has a clear strategy for growing the company’s investment management presence. 

“I think Bernstein is doing some interesting things in terms of which vendors he’s choosing to piece together and what he’s trying to do—he’s buying the right type of companies. There’s actually thought to it; it’s not just buying random cash flow streams. There’s a method to his madness,” the source says. 

Others say Paladyne’s quietness could be due to the overall compression and market pressure. 

Broadridge’s Mayadas clarifies that Paladyne is still alive and well and has been rebranded as Broadridge Asset Management Solutions (Bams), its buy-side business segment. Broadridge has integrated other businesses into that, such as Revport—formerly known as Bonaire, which Broadridge bought in 2013—a fee and invoice billing software for asset managers. 

He adds that historically, the market for Bams comprised medium-sized to smaller hedge funds, but that is changing. “Over time we’ve managed to grow into servicing much larger hedge funds and some of the largest hedge funds in the world have signed up now for Bams,” he says. 

Mayadas says users could benefit from the Itiviti acquisition via the integration of the Nyfix network into the Bams Fix connectivity layer. 

“Bams has provided a bunch of solutions to the buy side. They have an OMS, they have a portfolio manager, and so on. They also have a Fix engine that can integrate into Nyfix to make the buy-side integration experience more seamless,” he says. 

Playbook

It is still early days, and the acquisition is far from complete—Broadridge has a target of the fourth quarter of 2021—and it is still subject to regulatory approvals.

For Itiviti, perhaps nothing much will change for now. And maybe that’s a good thing.

Quod Financial’s Gabbay believes this is not a bad deal for Itiviti. “This isn’t like the Ion purchase. … They’re probably not going to get ripped apart by Broadridge. They’re going to maintain investment. They’re probably going to maintain objective and trajectory. They seem like reasonable owners, other than the pressure of having made the purchase, and what they do with it next,” he says.

However, there could be risks in the form of senior personnel leaving Itiviti. Multiple sources say Itiviti’s CEO Rob Mackay has done a great job boosting the firm’s profile and prepping it for a successful sale for Nordic. Now that the job is done, some believe he may move on to another venture. Mackay was not available for comment, though he spoke glowingly of the deal on LinkedIn.

The source familiar with Itiviti’s inner workings says, “I expect elements of Itiviti senior management to inevitably move on, including the CEO. Itiviti is reasonably streamlined now, but there are still areas where the belt could be tightened further. Broadridge is a behemoth in terms of personnel compared to Itiviti. Broadridge’s corporate governance structure is akin to a Microsoft or Oracle—meaning, kind of messy and not strictly delineated along lines that make total sense—hence why they’ll likely just leave Itiviti alone for the time being to be Itiviti. How the long-term vision proceeds from there is anyone’s guess.”

Still, this is a big move for Broadridge that puts it right in the front-office space, though it’s not likely to be its last, Consolini says. “Itiviti gives you the pipes and glue to get all of the connectivity together, and then you keep going in acquisition mode and look for other opportunities in the marketplace,” he says. “As a strategy, I think it completely makes sense.”