Analysis of CTRM and related vendor M&A activities.
Recent acquisitions in the ETRM space clearly indicate that many solution providers are moving to broaden their presence outside of the “traditional” ETRM model, seeking to service an ever increasing portion of the energy value chain. While the market for wholesale energy trading and risk management systems remains strong, areas adjacent to this market are showing similar strength and have drawn the attention and dollars of the ETRM vendors.
In previous years, acquisitions were primarily executed to gain market share. Companies such as Caminus and SunGard purchased smaller competitors, increasing their customer bases, but, in the process, they also expended significant energy and resources reconciling overlapping products and strategies.
The latest deals, however, do not come with the burden of competitive products. They offer the acquiring companies the opportunity to grow revenues without the attendant costs of supporting multiple products serving the same market or ending support for one or more of the products and trying to maintain and service customers through that process.
Asset Heavy Focus
Competition among the leading vendors, particularly in the “asset light” market (deals involving hedge funds, banks, and brokers) has been fierce. As that segment of the industry and the products servicing it mature, it is becoming increasingly difficult for solutions providers to differentiate themselves from their competition for these primarily financial players. Sales in this segment are becoming more about the vendors' reputations and less about the products functionality. However, for prospects holding significant assets, such as generators, utilities, and oil and gas producers, logistical and physical risk management challenges offer solutions vendors an opportunity to sell a combination of creative products focused on solving these unique and complex problems.
SunGard's Acquisition of Energy Softworx
SunGard Energy's recently announced acquisition of Energy Softworx enables the company to broaden their market reach without having to expend significant resources on product reconciliation. Energy Softworx has achieved success by focusing on unique logistical problems and in the process has become the market leader in the servicing of fuel management needs for power generators. Their FuelWorx product, with additional modules covering fuels budgeting, rail management, and gas fuel supplies, are targeted solutions that provide deep functionality in areas that are underserved by “typical” ETRM solutions.
We had an opportunity to meet with Debbie Wohlers, now COO of the Softworx group of SunGard's Energy Solutions unit, and Karen Dowd, SVP for Softworx customer services, product management and product development. Together, they formed the management team responsible for Energy Softworx's success as an independent company. They noted that the acquisition has been very well received by their customer base, indicating that SunGard has a very good opportunity to leverage Softworx's success to introduce the entirety of the SunGard Entegrate product family to those customers.
With this acquisition and the transition of the ACES power scheduling and deals management system onto the Entegrate platform, SunGard is now able to offer a broader asset oriented solution to merchant generators and utilities.
Matt Mandalinci, president of SunGard's Energy Solutions unit, has indicated that the company will continue to seek acquisition opportunities that allow them to increase their coverage up and down the energy value chain.
Other Recent Deals
In January of this year, Open Link Financial announced they had acquired IRM, a European based provider of asset management, forecasting, optimization and planning solutions for utilities, generators, and oil and gas producers. While primarily serving the European markets, OLF has indicated that they are bringing the solutions to the North American market and are focused on growing their presence in the asset heavy space. Their asset centric strategy is further evidenced by their recent announcements of the release of a new oil and gas producer services module and cMotion, a logistics and scheduling solution for virtually any commodity.
Solarc, a company that has seen significant success in the natural gas liquids, petroleum, and industrial fuels markets with their RightAngle product, announced late last year that they picked up Trinity Apex, a provider of physical gas management solutions. Trinity Apex's Ties II product provides significant gas producer, transportation, and storage functionality, giving Solarc a wider footprint in the physical natural gas markets.
The latest deal in the ETRM space, announced just two weeks ago, is the acquisition of Global Energy Decisions by Ventyx. Ventyx came into being earlier this year with the merger of Indus International and MDCI Mobile Data Solutions, creating one of the largest global suppliers of billing, revenue management, call center, materials management and service delivery solutions to the utility markets. With the acquisition of Global Energy's energy trading, risk management and asset management solutions, Ventyx is now positioned to cover the majority of the power utilities value chain from generation to retail billing and customer care.
Moving Toward Energy ERP
ETRM vendors are taking a more holistic view of the energy markets—not only acquiring products covering adjacent functionality, but also creating new ones, such as OLF's producer module. Certainly, ETRM will continue to be a lucrative market for these vendors, but areas such as asset management, forecasting, and planning and control are commanding more attention and becoming components of more comprehensive energy solutions. As one executive stated, “It's no longer just about ETRM—it's becoming more about energy ERP (enterprise resource planning).”
Customers Impacts
For systems providers, the advantages of serving the wider energy markets are clear: increased market opportunities and the ability to grow through acquisition without creating product conflict. For the customers of these systems, significant advantages also exist. Integration of the multitude of applications necessary to run an asset heavy business has always been problematic and expensive. Purchasing these systems from a single source helps to shift that burden from the customer to the vendor. Additionally, upgrading components of a single sourced solution should be less burdensome as the newly released products will be compliant with the vendors overall technology and integration framework.
However, downsides do exist. There can be significant risk associated with a single vendor supplying and supporting a majority of systems that businesses rely upon. In selecting a solution covering multiple operational areas, buyers need to be doubly certain that their chosen vendor is stable and has the financial wherewithal to weather potential market downturns. Additionally, the odds are that no single vendor will provide the best “fit” for every need of a complex asset oriented enterprise, leading to some level of compromise in order to get the best overall solution.
What's Next?
The upstream push will undoubtedly continue. Utility centric functionality is now a component of many of the leading ETRM solutions and the coverage is fairly extensive. Oil and gas producers are also seeing increased attention from providers; however, there are areas in this market that have not yet been impacted in the latest merger and acquisition activity, including production revenue accounting and land management. It would certainly not be surprising to see transactions in these areas within the year.
GFI Group Inc., the inter-dealer broker specialising in over-the-counter derivatives products and related securities, purchased Trayport for £75 million in February. Trayport provides real-time electronic trading software for brokers, exchanges and traders and the acquisition represents a five time multiple of Trayport's £14 million revenue per annum. The deal was anticipated to raise a few eyebrows across the European energy trading space as Trayport is a significant trading platform for European energy, while GFI is one of the main inter-dealer brokers. However, both companies have worked hard to allay any concerns.
What drove this acquisition, how does it impact current and Trayport users and what is the future for Trayport? I recently spoke with Alan Bright, PR Manager for GFI Group and Elliot Piggott, Deputy Managing Director for Trayport to get these questions answered.
The GFI View
According to Alan Bright, the Trayport acquisition provides GFI with an ability to enhance its electronic trading capabilities. GFI believes that the supply of electronic trading platforms is critical to its continued growth. In European energy trading, Trayport is a leading player and all major broker/dealers use it. So while GFI's strategy is to own the technology delivery platform, it is important to continue to do so in an open fashion. The Trayport platform has little value unless it is utilised by existing and future clients. Indeed, GFI see the platform expanding into many other areas and recent announcements regarding the Trayport distribution of NYMEX products and its relationship with Tradition, a large interdealer broker, certainly reinforce this strategy.
“Trayport is run at 'arm's length' by GFI Group and interactions are only at the Board of Directors' level,” Mr. Bright explained. “GFI Group remains a key client of Trayport as well as its owner.”
The Trayport View
From Trayport's perspective the motivations behind the deal seem to be slightly different. It sees the acquisition as affording it the opportunity to grow beyond the traditional European energy markets into North America and Asia-Pacific while offering the electronic trading of other asset classes via closer cooperation with GFI Group. It believes that the acquisition cost paid by GFI reflects Trayport's growth potential, and argue in response to worries over the acquisition that any change to their current growth model (being an open platform with respect to other broker/dealers) would certainly change Trayport's growth profile.
Trayport argues that the acquisition has not impacted its ability to write and support quality software and that, in fact, they have already expanded the market access side of the product since the acquisition through the addition of access to NYMEX, NordPool, DEX and ICE products. The announcement around Tradition also appears to suggest that their continued independence as a self-managed entity with the same business focus and management team has helped continue to establish the platform's value to other broker/dealers even post the GFI acquisition.
Mr. Piggott said, “GFI Group simply desired to grow their investment in technology and electronic trading. Meanwhile, Trayport continues to aggressively sell to GFI Group around the world as a strategic client."
UtiliPoint's Assessment
UtiliPoint believes that the acquisition of Trayport by GFI Group, while perhaps threatening to initially raise some quite genuine concerns regarding future platform openness, provides no real fear to Trayport's current clients. Our assessment is based on the idea that any change in Trayport's ability to be "open" with respect to other broker/dealers, would significantly erode its ability to deliver and impact its market share. At a valuation with a multiple in excess of five, this makes little or no sense for either party—it is a significant investment on the part of GFI. This view seems reinforced by the rapid progress that Trayport have made in providing new markets and products for their users via the platform and by the recent announcement of a five-year partnership with Tradition—another broker/dealer.
Present and Future
Trayport has a dominant position as an electronic trading and deal discovery platform in European energy trading where 100 of its 115 or so employees are based. Mr. Piggott points to the high predominance of OTC trading in Europe versus other regions like the United States, where OTC trading is generally not electronic and trading is more exchange-based. Trayport hope that the GFI acquisition will help them expand in other geographies including North America however.
Piggott also is a little surprised by the slow evolution of markets pointing to cross asset trading as an example and in the slowness of the traditional markets to get into commodities. He also points to freight rate trading as an area of growth where “three to four years ago, freight was considered too complex to trade electronically,” but is now a growth market. One thing is for sure, since the GFI acquisition Trayport has continued to add connections to its platform and exchanges such as SIBEX and ECOMEX have moved or are moving to its platform.
Given the turmoil that has subsequently occurred in commodity and other markets, the acquisition of ROME Corporation by Triple Point Technology in July, 2008 might prove to have been a very smart move indeed by the management team at Triple Point. At one time, credit risk management was the poorer brother of market risk management despite the emergence of both ROME Corporation and RAFT International a few years ago. RAFT was acquired by Financial Objects in 2006 which was subsequently acquired in 2008 by Temenos, the banking software company. ROME is now the credit risk side to Triple Point's business. But in today's volatile commodity markets, the assessment of credit risk is increasingly viewed as mission critical and accordingly, it is moving closer to the front office.
Credit Risk Emerging as a Key Requirement
Volatile commodity markets make for significantly increased risks and in an era of tighter credit conditions, credit risk management is a significant aspect of a trader's exposure. Lack of access to low cost capital, counterparty credit rating migrations and increased margin and cash calls as commodity prices have risen, have all contributed to the need to tighten credit and credit risk management at trading firms. The collapse of Lehman Brothers and the demise of Constellation Energy have already sent out ripples into the market which will have an, as yet, unknown impact, but the collapse of Enron and the energy merchants is surely still fresh in most people's minds.
Of course, markets have moved on today. There is significantly more trading by a greater diversity of players ranging from energy users through to banks and funds. There is greater absolute volatility and higher prices. There are more instruments and commodities to trade and more money at stake than ever before. There are more arbitrage opportunities and commodities as an asset class means that not all price movements are tied to commodity fundamentals or even market sentiment. These days, price movements can also be related to trading activities and market movements in other asset classes. So certainly, now is the right time for Triple Point and its ROME acquisition.
Understanding the Acquisition
One key aspect of the acquisition was the immediate benefit to ROME from being a part of a larger organization. Although ROME did an excellent job of earning some of the top energy and commodity companies in Europe as clients including E.ON, SmartestEnergy, Atel and BG, its European infrastructure was minimal at best prior to the acquisition with a small office in London and a reliance upon contractors to assist in implementations. Today, ROME has essentially doubled its entire staff due to internal training and significant European hires and has gained access to Triple Point's sales and support staff who can sell and support the ROME software. According to Dan Reid, VP, Credit Risk Solutions for Triple Point, “We have doubled our support staff and cross-trained our sales force, sales engineers and services people vastly improving our market reach and implementation and support capabilities. We can now also work with Triple Point's system integration and consulting partners as opposed to independent contractors.”
But Triple Point Credit Risk Solutions, as ROME is now known, is still a solution that can and has been deployed in conjunction with other ETRM and CTRM software platforms, not just Triple Point's. “We always had to integrate with a variety of platforms and so we use our credit integration tool which was built from the ground up to integrate us with many ETRM platforms,” Reid told me. This affords another advantage for Triple Point since the ROME software already integrates with Triple Point's solution out of the box but Triple Point aims to tighten the integration further believing that fully integrated risk and credit is increasingly a top requirement in the market. Essentially, Triple Point can have their cake and eat it too by virtue of being able to provide a credit risk solution to work alongside competitors ETRM products or offer a more tightly integrated solution of their own.
Feedback regarding the acquisition has been very positive says Reid as he can now offer significantly improved support and services as well as continue to serve their clients regardless of ETRM platform.
Europe Benefit?
The acquisition has probably most benefited ROME's capabilities in Europe however by providing them access to Triple Point's significant presence on the continent. In fact, Europe likely has a good deal of potential for Triple Point's Credit Risk Solutions. “Europe has so many different regional and national rules and regulations, different netting and pricing terms and so on that accentuates the requirements for a comprehensive credit solution” says Reid. Indeed, Europe is not yet a single homogenous market for trading and still has some way to go to meet that objective despite the EU's push towards that goal. There are also a larger number of counterparties and a lot more laws and regulations around things like equal access, for example that makes the trading picture a good deal more complex and impacts management of credit greatly.
When that increased complexity is set against today's trading environment it must equate to high demand for solutions and integrated solutions at that. It is today's market volatility however that has really brought credit into the mainstream focus for commodity traders. A trader can do a trade and hedge it eliminating market risk but ignores the margining and collateral requirements at their peril. “Often the cost of credit to support the trade is not properly considered,” states Reid.
Today, a trader must consider the credit aspects of the trade they are contemplating more than ever before. This involves understanding the credit quality of the counterparty, the cost of credit and collateral and a good deal more. “Traders have in the past depended on credit rating agencies to tell them that they can do a deal but now the world has been turned upside down,” says Reid. “Credit has been the watchdog and the stop sign but now traders need to be comfortable with the details. Credit is moving closer to the front office as a result.”
UtiliPoint Assessment
Indeed, UtiliPoint has already observed and commented on market liquidity issues related to the cost of credit that has impacted smaller physical players' ability to participate and we expect the situation to get worse not better over the coming months. In retrospect, Triple Point's timing in the acquisition of ROME couldn't have been better and in our assessment it adds a significant revenue contributor to the company. While there remains a risk that users of competitors' ETRM software will be less likely to procure Triple Point's credit risk solution, the bare facts are that there are few, if any, true alternatives squarely focused on energy today and credit risk remains something of a 'best of breed' solution category anyway.
Credit risk management and its integration into ETRM and CTRM solutions will increasingly become a key factor in the battle for market dominance in the space. Through its timely acquisition of ROME, Triple Point has placed itself in a potentially market leading position to provide a broader-based solution or even a best of breed component. At this time, Triple Point's acquisition appears to have been extremely well timed. We will see.