I've been reading a fair amount lately about how merger and acquisition activity is about to heat up and how it will forever change the mortgage technology landscape. I agree with the first part, and I've already met with a number of executives who are actively seeking acquisition opportunities. I do not, however, believe that we're going to have only a few big conglomerates serving the industry in a few years. If a few big companies with broad product menus could dominate our business, the F companies (Fidelity
, First American
) would have done so long ago.
That's not happened, of course. The big firms bought up cheap tech firms when they found them affordable, wrung the innovation out of them as they tried to force them into their company's structural lattice and then tossed them to the curb as soon as they no longer provided enough of a return. As much as the big firms wanted to say they had an “end-to-end” offering, they weren't usually willing to give away profitability to subsidize a weak link.
And who could argue with them? Aside from the customers who bought into the service because of the great discounts that came with the bundled offering only to find out that the service was being discontinued and they were being forced to go back to smaller, more specialized firms with their hats in hand.
When the downturn started to suck the resources out of smaller technology firms, we saw a fair amount of consolidation from bigger firms that saw bargains. The Indian firms moved in quickly, with ISGN
making acquisitions. Domestic firms had already begun their buying, with Xerox
all trying to get in on the business. Most of those firms have found the downturn lasting longer and being more uncomfortable than they anticipated, though with some success to show for it. But that hasn't kept smaller firms, including new upstarts, from entering the fray.
The "big firms inherit the earth" theory also suggests that lenders will suddenly realize that it's just a whole lot easier to put all their eggs in one basket. That way it's easier to point the finger when they go out of business, I guess. This is not what happens in real life. Bankers are risk averse and expert managers who happen to manage risk for a living. They never put all their eggs in the same room, much less the same basket. If they did, the F companies would own the world by now.
M&A activity will increase in the months ahead, that much is true. The firms that have decent products or services but insufficient client support to maintain cash flow will make easy targets for bigger firms that have money to spend. Those companies know they can make more money by putting their profits back into the same game if they can get existing clients to use them for more parts of the transaction. In a business as fragmented as mortgages, it takes many partners to complete a transaction. So filling more of the seats at that table makes good sense. It's usually just a matter of pricing to lock out smaller competitors.
But lenders are savvy to this and it's a game of diminishing returns. You want to have a few really key parts of the technology puzzle, but few lenders will buy everything you have.
It's not just the risk involved. Smaller tech firms in our space have a long history of successful innovation. They work harder, often have some expertise on the lending side and are not likely to abandon their niches when things get tough, unless they run out of cash, which is a bona fide risk. Some will sell out in the next 18 months, but think of that as profit-taking, capitalizing on the hard work they've done to build up their firms. More than a few of these guys will be back building something else in another small firm in 3-5 years, providing a challenge to the "M&A consolidates the world" argument Wall Street guys will make in the future.
Rick Grant is veteran journalist covering mortgage technology and the financial industry.
Follow him on Twitter: @NYRickGrant