New York-based global ratings and risk management specialist Fitch Group completed its acquisition of Toronto-based enterprise risk management (ERM) software supplier Algorithmics in late January. Under the $175 million agreement, Fitch’s risk software and advisory elements will be amalgamated with Algorithmics, which will also receive funding and support to further develop its product suite and risk management services. Founded in 1989, Algorithmics has been a pioneer in the application of technology to ERM. The company has more than 150 clients globally, including some of the biggest risk installations at the world’s biggest banks, such as HSBC and SG.
But developing and supporting such complex large-scale software needs deep resources, and the company struggled to generate the necessary funding from revenues. Over the years, Algorithmics obtained several rounds of funding from a group of investors, including Morgan Stanley and Commerzbank, most recently in March last year. In 2001, the company filed a preliminary prospectus for an initial public offering, only to withdraw it later that year when the market cooled on technology stocks. However, with the emerging requirements of Basel II – which demands new functionality of risk systems and presents substantial market opportunities – and key investor Morgan Stanley acquiring rival ERM software vendor Barra last year, Algorithmics was in need of a strong partner.
“Risk management is an exciting and growing market with a lot of opportunity, but it is a global market, where global vendors are required to support global clients; and you need a certain scale to do that effectively,” says Michael Zerbs, president and chief operating officer of Algorithmics. “Also, the effort in developing industrial-strength software at the level and scale that Basel II requires is easier to do in a large company.”
For Fitch’s part, it has seen its ratings competitors extend their operations into risk advisory and software over the past few years, with New York-based Standard & Poor’s (S&P) creating its Risk Solutions division, and California-based Moody’s acquiring credit analytics specialist KMV.
“We started investigating whether we should take a stronger position in the risk analysis and portfolio area about three years ago,” says Stephen Joynt, Fitch’s president and chief executive officer. “The reason S&P, Moody’s and Fitch are all interested in doing this is because it is a natural extension from doing just credit risk analysis and individual bond ratings to doing portfolio analysis, first on credit and then on any kind of risk.”