John Guzzo is a managing director at Berkery Noyes
, an independent investment bank specializing in mergers and acquisitions within the information and technology industries. He joined the company in 2005 as vice president after spending 11 years working for Giuliani Capital Advisors
and Ernst & Young
. For this edition of In This Corner
, Guzzo gives his take on how a changing mortgage market is boosting the technology sector and stimulating M&A.
Have all the recent regulations been a boom for mortgage tech providers?
Overall, recent regulations have actually created a significant boom for mortgage tech providers, particularly for those vendors with enough capital to build or acquire technology providers in response to the regulations. All of this has opened up a new revenue stream. For example, a number of technology vendors have transitioned their solutions in response to the Fed’s Home Affordable Modification Program (HAMP). By doing so, these firms increased revenues and profits, and moved themselves to the front of the pack. For those vendors that couldn’t afford to reinvent themselves, however, the environment has been tough.
What is the draw for being an end-to-end provider and acquiring these companies?
The benefits of being an end-to-end provider span the originations, servicer, and secondary markets of the industry. But for simplicity, let me provide an example on the origination side, which comprises a large segment of the overall vendor tech industry.
Well first, let’s start by defining what I consider as a “true” end-to-end loan origination solution provider. As I define it, it is a vendor that owns and has control of all their offerings, and can provide everything from lead generation and pricing, to credit checks, compliance reviews, electronic document management, all the way through closing.
- From the lender/servicers perspective, it’s easier to manage one vendor – and have one point of contact.
What do fewer lenders mean for tech vendors?
- From the technology provider, it’s more productive to “own and control” the solutions--the days of 10 or more vendor partnerships are gone--and it’s more profitable to own than to partner
Many new tech providers were born out of the 10-year real estate run-up that ended in late 2006. Most of these firms still exist today, and many have robust technology and strong operations. But with fewer lenders and significantly fewer types of loan products, a healthy tech market simply cannot survive with the number of tech vendors that exist today. So, there will be a push for critical mass – which will create more M&A activity.
Fewer lenders mean less customers for technology providers, which in turn means more vendors chasing fewer customers and thus more competition. This dynamic forces vendors to differentiate themselves by offering more robust and flexible technology. With a highly fragmented market and lots of vendors to choose from, the predominant decision will be to acquire the solution provider and not build the technology.
Important to note, the credit crisis filtered and displaced many of the less attractive tech providers. The ones in operation today have proven their resiliency to market turmoil by having survived (and some thrived) one of the worst real estate markets in history.
What about the next six to next 24 months will be key for tech acquisitions?
Over the next 24 months, we predict there will be heavy consolidation and significant M&A activity in this market. There are three key acquisition drivers:
(1) The need to become true end-to-end solution,
(2) A trend towards ownership in lieu of partnerships, and
(3) The need to establish critical mass in order to sustain and grow profitably.
Having survived the credit crisis, many mortgage tech vendors are operating at, or just above, their break-even profit mark, meaning that each additional incremental dollar of revenue would add significantly to their bottom line. These types of companies are attractive to strategic acquirers. Once they acquire the company and sell through their own distribution to a larger customer base, the acquired company’s solutions generate significant profits as part of the larger company.
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