Does Deutsche Börse Have the Pieces to Build a Buy-Side Tech Powerhouse?

Last week, Deutsche Börse Group, an international exchange organisation and market infrastructure provider headquartered in Germany, formally offered to acquire all shares in SimCorp A/S. The deal is expected to be completed in Q3 of 2023. The proposed deal also coincided with the announcement that two existing subsidiaries, Qontigo and ISS, will be united under one leadership within the new “Investment Management Solutions” segment, a business that could possibly be spun out in the medium term through an IPO.

If the transaction is successful, SimCorp would likely be integrated into this new business segment. The acquisition would bring Dimension, a core front-to-back investment management platform, into the fold for Deutsche Börse Group. Additionally, it would add over 300 clients that utilize Dimension and other products related to data management and client reporting.

What are the prospects for the new segment and potential synergies with SimCorp?

SimCorp is one of the few independent, focused tech providers in the market with a core platform that can compete with larger providers of investment management technology. It is also a well utilized platform in the large asset owner space across insurance, pension, and sovereign wealth segment. The industry is gravitating toward core platforms that can cater to front-, middle-, and back-office needs, and SimCorp Dimension is considered a viable option by many larger buy-side firms alongside platforms like BlackRock’s Aladdin, State Street Alpha, and Bloomberg's suite of products.

Deutsche Börse Group’s existing business Qontigo is known for its heritage Axioma investment analytic products and STOXX indices business. The integration of Qontigo with existing partner, ISS, a leader in proxy voting and services and ESG data, ratings, and research, will broaden the new business segment to more closely mirror with Qontigo's major competitor, MSCI. MSCI remains approximately 3.5 times larger than the two subsidiaries, based on 2022 revenue data. As a direct competitor, it will be a model of cost benefits and growth synergy opportunities, but competing directly with a similar offering will only bring in so much revenue potential”

Aite-Novarica Group believes the real synergies lie within SimCorp’s 2021 partnership with Qontigo.  Around 10% of SimCorp’s clients already use Qontigo products, and more could be convinced if bringing the two companies under one umbrella leads to clear advantages for clients (e.g., cost, vendor management, expanded expertise). SimCorp also has a notable partnership with MSCI that may be tolerated for some friendly competition, just as Qontigo commits to its open platform approach as it integrates with other platforms that may compete with Dimension, such as CRD and Enfusion. The takeaway is that organizations are more likely to change risk systems than to change core portfolio management platforms, having all the pieces for Deutsche Börse may be the clincher for buy-side firms consolidating vendor relations.  

The full integration of Qontigo’s products within Dimension would no doubt beef up its capabilities natively around risk, portfolio analytics, and optimization and bring it more in line with SimCorp’s major competitor, Aladdin. These are not only areas where Dimension has been seen as second best in comparative capabilities, but also areas that are extremely important to clients look for one holistic portfolio view, such as asset owners. Equally important will be the continued investment in turning SimCorp into a fully Software-as-a-Service (SaaS) business and modernizing its core Dimension platform, an area where it lags both competitors and cloud native challenges.

What does this mean for SimCorp clients and Dimension’s prospects?

The acquisition of SimCorp may be one of the larger fintech deals of 2023, but the industry has a long history of large acquisitions, such as:

• State Street Corporation’s acquisition of Charles River Development in 2018 for US$2.3 billion
• SS&C’s acquisition of Eze Software in 2018 for US$1.45 billion
• BlackRock’s acquisition of eFront in 2019 for US$1.3 billion
• LSEG’s acquisition of Refintiv in 2021 for US$27 billion
• S&P Global’s acquisition of IHS Markit in 2022 for US$44 billion

For SimCorp clients, a change of ownership naturally raises questions and concerns. Elements that have defined successful acquisitions in the past are the messaging, continued commitment to the product, and investment in research and development (R&D). Clients will be looking for assurances that the acquisition is not solely driven by stable cash flow considerations, as such a focus tends to lead to a decline in technological platforms over time.

The acquirers will also need to demonstrate they can support Dimension’s cloud transformation into the modern tech area, which is increasingly valued in the industry. Additionally, a commitment to continued expansion and the delivery of a client-centric product roadmap will be essential to instill confidence. By emphasizing these factors, the new owner can alleviate concerns and foster trust among SimCorp's clients. Deutsche Börse Group has a track record of this as demonstrated by its previous acquisition of Axioma.

What’s next?

Aite-Novarica Group has been asked if SimCorp fully rounds out the front-to-back offering for Deutsche Börse Group. From our vantage point, one major functional gap that could be considered for an additional tuck-in acquisition would be an EMS provider. That would complete its journey to create a buy-side fintech powerhouse. Have thoughts on the SimCorp acquisition? Contact me here to discuss this topic further.