Is the Trigold/Crystal merger good news for the industry?

Crystal specialises in mortgage point-of-sale solutions whereas Trigold focuses in mortgage sourcing systems. By combining their solutions and expertise, they can become a mainstream technology supplier with considerable market muscle.

Importantly their respective business models and skill sets appear to complement each other - Crystal brings its technology platform and 'online' enterprise solutions' expertise, whilst Trigold provide domain knowledge and a wide range of synergistic relationships with lenders and distributors, along with strongly recurring licenses from a client base that will help to shape and drive further profitability.

The overlap in functionality between Trigold and Crystal is small and because the two companies have partnered for years, their solutions are well integrated, so a sensible combined sale pitch is available from the start.

In the short term the main failings would now appear to be outside of their core mortgage market as the combined company is yet to provide a fully competitive financial planning solution.

They have a lot of the horizontal functionality around CRM, compliance & sales process but currently lack some of the vertical specifics of key integrations for commissions and valuations and are missing some of the more sophisticated financial planning tools.

Trigold Crystal will also now invest in moving their sourcing platform online - a move long overdue and the lack of progress towards has let several new entrants into the market.

As AT8 understand it, the strategy is to use the Momentum platform as the basis for a new online sourcing module with the vision being for the Momentum framework to be deployed as an upgrade to Prospector users but with some Momentum functionality 'switched off'. The additional functionality will be available for an additional cost which will enable them to promote Momentum functionality everyday to 22,000 users. They liken this strategy to Sky TV and having the option to add the movies or sports channels to your base package.

It will be interesting to also see if the merger will also help the new organisation to sell enterprise solutions to lenders. They will have all the bits of the jigsaw for branch based POS, lender intermediary extranet and consumer orientated sites. The test will be whether they have the scale and the sales and marketing capability to enter this space.

The size of the new combined company is not clear as both companies have been operating in a shrinking market and the last sets of results will be out of date. However, AT8 believes that both companies to have been comfortably profitable last year and expect the new organisation next year to have a turnover in the region of £7m generating a profit of over £1m.

The combined client base of the merged organisation will be significant, and even with the recent market shrinkage is likely to top 22,000 users.

The management of the company will incorporate the existing management teams, with Jon Whitmore and Martin Colyer, sharing the Chief Executive role, with Patrick Shuker becoming CTO . AT8 would have preferred to see a single CEO in place to provide clear and consistent leadership and avoid the potential for disagreement or delay in decision making. However, we do welcome the fact that Patrick will have a board position as CTO, as we believe that Trigold have suffered from the lack of a strong technical voice at board level in the past.

Crystal shareholders will take the majority shareholding (60%), with the remaining going to the existing Trigold shareholders. However, this will exclude Martin Finegold who has taken to opportunity to exit. We believe that the Crystal shareholders have invested additional money to obtain this majority shareholding control.

One strange twist of fate is that Crystal's offices are right next door to Mortgage Brain Ltd (MBL) so MBL and the new entity Trigold Crystal Ltd are now to be found on the same small business park at Bromsgrove in the Midlands -it's a small world!

What will the impact be on the industry?

The merger definitely creates a strong player in the market and should breathe new life into the organisation that will put pressure on the key competitors. Mortgage Brain will particularly be under threat as their acquisition of 'The Key' is not as strong a proposition as Crystal's Momentum. However, The Key is marketed at a far more aggressive price point and we may see a market polarisation around price. Other Point of Sale (POS) providers may also feel the pressure to react with M&A activity. However, until Crystal strengthens their general Financial Planning tools, the likes of Focus, Distribution Technology and Vertex are unlikely to feel much impact.

Technology suppliers to the market have typically relied on detailed knowledge of Financial Services' sales and compliance processes. As a result, the big IT companies like IBM and Oracle have often failed to penetrate the market, allowing lots of small specialist companies to serve this space. Someone recently told me that they evaluated 39 suppliers when looking for a sales system - in anyone's definition that must be an oversupplied market. It will be interesting to see if further M&A will occur in this sector either as a tactical reaction to the economic climate or a strategic reaction to the synergistic opportunities and potential benefits of scale.

From a selfish point of view, the oversupply creates opportunity for consultancy operations like AT8 to use their knowledge and selection methodologies to help distributors choose the most appropriate solution for their needs from this wealth of suppliers. However, the number and size of these operations may not be sustainable or desirable and we believe further consolidation is inevitable and desirable. And with our knowledge and understanding of the various suppliers, we would also be well placed to advice which companies are best suited to merge or be acquired.

Focus Solutions has long declared its intention to grow the business by acquisition, SSP are now owned by a private equity company that typically owns much larger organisations and will surely bankroll further acquisitions. Indeed, despite the current economic climate, rumours are rife in the industry as to who is for sale and who will buy whom.

An industry reshuffle could produce some substantial organisations, but mergers don't always produce the desired results. Technologies may not be compatible, personalities and cultures may clash, strategic stories may not align. Real danger lies in those mergers that happen because they have to happen to survive or to satisfy acquisitive shareholders rather than be driven by the primary motive of creating a combined strategic competitive advantage. It will be fascinating to watch this space over the next 12 months and to see which companies rise out of the pack as the strategic winners.

IFAonline

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