Robert Kugel's Analyst Perspectives

IBM’s announced pending acquisition of Algorithmics is an important addition to the company’s portfolio of business applications aimed at financial services companies, and it is thematically consistent with its other acquisitions in risk management and analytics such as IBM’s OpenPages risk management documentation that I have already assessed. It’s also a good fit for IBM’s professional services organization, which has a significant position in the financial services industry.

Analytic models are indispensable for supporting financial services operations and managing risk and regulatory compliance. Algorithmics has established a leadership position in this market with software that addresses a number of critical business needs in financial services, notably risk management for securities trading and credit, financial services operations management, collateral management, capital adequacy and liquidity risk management. The company has 350 customers and generated US$164 million in revenues in its September 2010 fiscal year. IBM indicated the Toronto-based company will continue to operate as an independent entity for the time being.

The near collapse of the world’s financial system in 2008 and the subsequent reverberations have led to a rethinking of financial services regulation and especially capital adequacy. In the United States, the Dodd-Frank Act is in the process of adding a substantial number of new regulations and an expansion of regulatory reach. All of this will impact how most financial services companies manage risk, operations and regulatory compliance. The serious shortcomings of Basel II international capital adequacy rules to ensure capital adequacy have lead to Basel III. Meanwhile, I believe financial institutions are facing a new environment where optimizing the management of regulatory capital will join efficient regulatory compliance as a long-term determinant of competitiveness. Too much of the latter remains a manual or  only partially automated process in institutions with otherwise state-of-the-art financial systems.

For vendors of modeling, analytics, operations and risk management software,  the banking sector probably has the best growth prospects of any industry for the next five years, but I expect insurance also to be an attractive market. IBM’s professional services presence in this vertical makes it likely that the company can derive significant incremental revenue from the Algorithmics acquisition.

All the best,

Robert Kugel – SVP Research