Eyeing the buy-side community's demand for tying electronic execution and cost measurement tools into the rest of the portfolio management process, yesterday Investment Technology Group (ITG) said it plans to acquire Macgregor, a leading provider of trade order management systems (OMSs) to the buy-side community for $230 million in cash.
The pending transaction ends months of speculation surrounding a possible sale of the Boston-based OMS provider. Macgregor's software is a central hub for trading used by 110 blue-chip institutional clients -- including Babson Capital, Delaware Investments and T. Rowe Price -- with about $5.5 trillion in assets.
Last week, rumors circulated that Reuters, SunGard and Thomson Financial were among the bidders for Macgregor, according to industry sources. But, ultimately, ITG, a pioneer in developing algorithmic trading strategies as well as pre- and post-trade transaction cost analysis (TCA), prevailed over the pure technology companies.
"I think it's a natural extension of what's going on in the industry," says Raymond Killian, chief executive officer of ITG, referring to buy-side traders taking more control of their order executions through the availability of technology, measurement tools and the delivery of algorithmic servers off OMSs.
"Strategically a lot of orders are being handled electronically today. It's low-touch technology. I think that's an irreversible trend," says Killian. "So having a complete cradle-to-grave solution is an obviously attractive position to be in," the CEO says.
Reacting to the deal, Sang Lee, managing partner at Aite Group, says, "If you're able to leverage the presence that Macgregor has among buy-side firms, I think it's a positive overall." However, Lee cautioned that the buy-side OMS market has been under pressure in terms of price compression and essentially clients wanting a lot more for a lot less.
Referring to software licensing fees, Killian notes that one of ITG's objectives was to move its revenue mix to the recurring side. "Macgregor's revenue is 85 percent recurring as opposed to broker's revenue which is not recurring," says Macgregor's Killian. Revenues are in the mid-$50 millions with 24 percent to 28 percent profit margins, and the deal will add to ITG's earnings in the first quarter of 2006, Killian notes.
Calling the combination with Macgregor "a strategic initiative," Killian suggests it will move ITG into all phases of the investment management process. Right now, ITG operates in three phases of the trade life cycle: "We're in pre-trade analytics, execution and measurement of how well you executed with TCA, he notes. Meanwhile, Macgregor covers the complete continuum from manufacturing of the portfolio to setting up all the compliance rules and delivering the trades to execution and compiling all the execution reports at the end of the day, he notes.
In yesterday's release, both companies said they are eyeing the potential to put together a complete solution for investment management firms, that spans portfolio modeling, compliance, execution, operations, analytics, post-trade reporting and a financial-services network.
Part of the allure of acquiring buy-side OMSs is still the Macgregor Financial Network (MFN), which reaches 280 or so brokers as well as electronic communications networks (ECNs) and alternative trading systems (ATSs).
"That carries some clout," comments Denise Valentine, analyst at Celent Communications, adding that MFN is the oldest OMS, though other competitors are launching similar financial networks. "Right now Charles River is launching one, FMC has FMCNet in Canada and is going to bring it into the U.S., and SunGard has the SunGard Transaction Network (STN)," Valentine notes.
But Valentine says Macgregor ought to be run as a separate company. "If the buy-side community perceives that there's a conflict of interest or a product that is an ITG broker product, they are less happy about it," she says.
One question is whether Macgregor will continue to be perceived as a broker/neutral platform since it will be owned by ITG, a technology provider that offers its own algorithmic trading strategy servers, and has a broker/dealer that operates the POSIT crossing network.
"In terms of being aligned to a broker-dealer, you certainly lose some level of independence but, at the same time, there aren't that many independent technology providers out there," notes Sang Lee, managing partner at Aite Group, who compares the situation to Goldman Sachs owning the REDIPlus platform and Citigroup acquiring Lava Trading.
Many institutions already use the Macgregor Financial Network to route orders to alternative trading destinations such as Liquidnet, Pipeline and POSIT.
"If other people had bought Macgregor, they could be hostile to Liquidnet, but ITG is broker-neutral. They just want to get the trade done," according to Steven McLaughlin, managing partner in Financial Technology Partners, the San Francisco-based investment bank that was the exclusive strategic financial adviser to ITG in the transaction -- and also arranged Liquidnet's $250 million private equity financing earlier this year.
Management for ITG and Macgregor assured customers that both companies are committed to remaining broker-neutral.
In an e-mail sent to clients after the transaction was announced, Steven Levy, president and CEO of Macgregor, said, "It is important to note that your broker neutrality and anonymity requirements will continue to be held paramount. You will continue to be able to trade with any broker and liquidity venue you chose."
Killian emphasizes that ITG is a neutral broker-dealer, noting that 15 percent to 20 percent of its revenues are generated by other broker-dealers and that Macgregor also serves broker-dealer customers. "I don't see any change in the way that we or they do business with the institutions," Killian says.
The transaction is expected to close in the third quarter of 2005. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio