Consolidate to accumulate



Michel van Leeuwen's dream had always been to start a dive school in the tropics. A native of the Netherlands, he spent time in California before joining the European Options Exchange in 1988 as a market-maker. In 1997, after accumulating some capital, he left the business world and set-up a dive-lodge in Fiji. It lasted until he received a call from a head-hunter a year later. "Paradise isn't paradise when you're there everyday," he says. He joined Algorithmics as managing director for Europe, the Middle East and Africa, helping found the Canadian company's European office in Frankfurt, before moving to State Street, as managing director of global sales and marketing for its risk management business.

For the past two years, he has run the risk management division of Misys Banking Systems (MBS), which he admits was disorganised when he joined. The vertical structure within the division left a legacy of product overlap and friction between divisions. "We had different parts of the business competing for the same contracts. When you're numbers one and two on a shortlist, you can be very effective at criticising the other parts of the firm because you know them well. The problem is another company could then win the contract," he says.

Van Leeuwen joined as chief operating officer of the risk division and was promoted to chief executive of the risk division within six months. He joined just after MBS had gone through a restructuring period, undertaken in April 2003, which left it with six business lines: asset management, retail, wholesale, securities trading, Summit and risk. Since then, it has divested its securities trading division, bought by Paris-based electronic trading software firm GL Trade, and its asset management back-office systems after a management buy-out, for around £25 million. This left it with its core businesses: retail banking, wholesale banking, Summit (treasury and capital markets) and risk.

Van Leeuwen's time at Misys has come during a period of consolidation within the industry, as a wave of high-profile sales has shaken the technology world. Last December, Toronto-based Algorithmics was acquired by rating agency Fitch for $175 million. Then, in March, a consortium of private equity investment firms bought Pennsylvania-based software giant SunGard for $11.3 billion.

And Van Leeuwen reckons this may just be the tip of the iceberg. With similar consolidation in other parts of the business software space – for instance, Oracle's recent $10.3 billion takeover of arch-rival PeopleSoft – further mergers in the risk management technology sector look inevitable. Microsoft, for instance, hasn’t shown any interest in banking software, but has a $35 billion cash pile it has yet to tap into. Van Leeuwen is actually surprised Microsoft hasn't entered the market. "If you own the user in the office, you'll own them at home," he says, implying that Microsoft could leverage a position in business software to tighten its grip on the sector. And he wonders whether Oracle will now expand in the application space for banking.

At the same time, the revenue available from risk management software, regulatory and compliance focused applications, relative to other parts of the banking technology and data provision business, is highly attractive. Van Leeuwen thinks the larger firms are likely to buy market share rather than grow organically, given the low multiples at which some of these companies trade. "Treasury and capital markets and wholesale are now selling into well-defined market-places, leaving little scope for high growth. Risk systems have the highest potential for revenue growth in the future," he says, attributing this to the increasing importance given to regulatory and compliance risk management within the banks. This is especially true of Basel II compliance, to which banks have reportedly earmarked $8 billion.

Top-tier banks are no longer buying the amount they used to, either purchasing fillers to plug holes in legacy systems or designing proprietary systems themselves. "I don't focus on tier-one banks. We would like them as customers, obviously, but they have enough resources to design and develop what they want. Specifically in risk, there's a shift towards a modular, best-of-breed approach to software," he says. The main sources of revenue for technology firms such as Misys are now tier-two, three and four banks, such as those in emerging markets, which want to implement systems from scratch but don't have the resources to design technology in-house.

"Prior to 2000, risk systems were seen as all cost," he says. Not only that, but banks often didn't use much of the functionality available to them – as little as 10% in some cases – because much of it was added after negotiations between consultants and vendors and not end-users. Now, as risk management becomes more sophisticated and the systems themselves shift from mere policing to aiding the allocation of capital, the next generation of software may well start helping the decision-making process in ever more complex areas.

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