A clear market leader

How will SunGard’s acquisition of rival vendor Caminus change the market for energy risk management software? Kevin Foster reports

The acquisition of energy software company Caminus by rival vendor SunGard will make the combined firm a clear market leader in the US. But the move is a long way from ending competition in this rapidly changing market, says Gary Vasey, president of Houston-based consultancy VasMark Group. Instead, he predicts SunGard will face a new set of challenges, as it seeks to rationalise its business strategy following the takeover.

“By our estimate, there are more than 40 vendors of energy trading and risk management software in the US,” he says*. “The demise of the merchant sector post-Enron has left the market volatile and uncertain.

“It’s not as if we’re looking at a single market with a set of standard requirements – and that means that in the short to medium term there’s room for a large number of competing solutions to cater to these diverse requirements,” Vasey adds.

Asset management shift
Specifically, physical transaction management requirements are extremely complex, says Vasey. There is a lot of regulatory uncertainty in the US power and natural gas markets, stemming in part from the Federal Regulatory Energy Commission’s efforts to introduce regional transmission organisations to the market.

“The key themes in the energy sector are risk and credit management and the move to a more asset-centred model,” says Vasey. “Energy companies have switched their focus from profit generation through trading to the need to understand the risk profile of physical assets.” Which, he says, is unfamiliar ground for some energy software companies.

“Most of the market-leading vendors, such as Caminus and SunGard, came to energy from the financial trading sector,” he adds. “To some extent, they’re playing catch-up in providing a product that can model physical assets and assess the volume of physical risk.”

David Bucknall, chief executive of London-based energy risk management technology company KWI, echoes these views. Speaking to EPRM’s sister publication RiskNews shortly after the SunGard-Caminus deal was announced, he said: “Since the collapse of Enron, the market has shifted away from the trading-centric model to an asset-heavy model. This has caused a downturn in demand for pure trading systems.

“We see this merger as a defensive move of two trading-orientated software companies,” he adds.

Synergies
SunGard specifically addressed this issue when announcing the deal. “Caminus and SunGard will exploit the synergies that exist between our solutions to meet the new demands of the energy industry, where companies increasingly focus on integrated software solutions to support their physical energy business,” said Jim Ashton, group chief executive of SunGard Trading and Risk Systems, in a statement.

There is no doubt the takeover will make Pennsylvania-based SunGard – already in the leading group of energy software vendors – an even stronger force to be reckoned with.

The $160 million acquisition, which was announced on January 21, has been approved by the board of directors of both companies. SunGard says it expects to complete the deal by the end of March 2003, after which time Caminus will become an operating unit of SunGard Trading and Risk Systems.

Caminus has about 250 clients and reported revenues of $84 million in 2002. SunGard Risk and Trading Systems has more than 900 clients in the financial and energy trading sectors, while its parent company SunGard has a total of over 20,000 clients and annual revenues of more than $2 billion.

But VasMark Group’s Vasey sounds a note of caution. “SunGard is now without doubt the big fish in the sea, but it’s going to face some new challenges,” he says. The Caminus purchase gives SunGard an even wider array of products – Caminus offers 14 separate energy software packages – and Vasey questions whether Caminus was ever able to bring its products together under a unified marketing strategy. SunGard currently has three offerings in its Panorama group for energy markets.

Coherent strategy
“SunGard will need to develop a coherent product strategy to make a success of this acquisition, and I expect the only way they will be able to make a profit is to eliminate some of those products,” he says. “This is a very good move for both companies. But does it mean that competition is over, and everyone will now buy SunGard products? No.”

Instead, he predicts an upturn in business for vendors across the sector. “There was an immediate lull in demand for trading and risk management systems post-Enron, as companies re-assessed their strategies. But we’re in a replacement market now,” he says. “A lot of energy firms have packages and in-house systems built around a mid-1990s model that doesn’t meet the new physical requirements of the market. There’s a pent-up demand for new systems starting to emerge.”