The activities of major horizontal industry players such as Oracle (Redwood Shores, Calif.) and HP (Palo Alto, Calif.) have added a new dimension to the insurance technology vendor arena, which continues to yield more-predictable spurts of mergers and acquisitions involving large vertical players assimilating smaller ones. Despite the differences between these types of transactions, both raise questions about how the traditionally dominant insurance technology players will react. Given that context, news of Fiserv's (Brookfield, Wis.) decision in July to sell a majority share of its insurance assets to a private equity player at first glance suggests surrender more than a determination to compete. A closer look at the deal, however, suggests that the opposite is closer to the truth.
One of the deal's unique features compared to other recent M&A activity in the space is that the investment in the vendor came not from a large technology firm but a venture capital company. Trident IV, a private equity fund managed by Stone Point Capital (Greenwich, Conn.), will invest approximately $540 million to gain a majority interest in Fiserv's insurance businesses. As with Oracle's recent acquisitions of AdminServer and Skywire, Trident IV's investment demonstrates confidence that the insurance technology market provides an opportunity for profit.
That confidence runs counter to understandable fears that insurance technology investment will tank in the near future. "Say what you will about tough times in the financial services sector these days, [but] some investors still believe there are brighter days ahead," comments Donald Light, a Silicon Valley-based analyst with Celent.
Light likens the Fiserv/Trident deal to the 2005 acquisition of SunGard (Wayne, Pa.) by several private equity firms. "These purchases represent a view that in good times or bad, financial institutions are going to need the right technology and infrastructure to succeed," he says.
Fiserv's internal concerns also seem to discourage interpretation of the deal as a retreat. Following its $4.4 billion acquisition of CheckFree, Fiserv's retention of a large minority interest bespeaks the same kind of confidence that motivates Trident. Under the new shareholder configuration, Fiserv can continue to benefit from its insurance businesses while transferring their management to Stone Point, a company that specializes in the insurance industry.
"Fiserv's leadership has sold part of the group but not all of it because they believe in where the business is going and want to participate in that growth," comments Eddie Jones, Fiserv SVP of marketing and product management. "However, they have big issues on their plate and see the opportunity to bring in Stone Point Capital for their intense insurance experience."
For now, insurance customers will deal with an entity known as Fiserv Insurance Solutions. But, Jones notes, the company will rebrand in the near future.
The commitment of Stone Point/Trident IV -- like that of Oracle and HP -- demonstrates the vitality of the insurance technology market and should bring further value to the industry. When it comes to individual customers of particular vendors, especially small customers of small M&A vendor roadkill, results may vary, however. Still, on balance, entities pouring resources into competing for insurance customers is likely to do customers good.
"I see the stronger players, those which have the resources and wherewithal, adding benefit to the industry by providing depth of solutions, hopefully investing heavily in R&D and reducing the number of vendors insurance IT executives need to deal with," says Bill Jenkins, CIO of Penn National (Harrisburg, Pa.).
"Needless to say, these benefits depend on the acquiring company's long-term strategy and philosophy. If they see such acquisitions as fast money or as a cash cow and do not look to enhance or invest in the future, they will end up reducing the number of competitors and could stifle innovation," Jenkins adds. "Overall, I believe the benefits outweigh the negatives."
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio