Analysis: 1st The Exchange and N4 deal

Consultancy AT8 examines 1st The Exchange's takeover of software distributor N4 Solutions (N4).

Background

The number of suppliers of technology solutions to the UK market has grown steadily over recent years. We have new and relatively new start-ups such as 2020 Adviser and True Potential, we have overseas companies entering such as Profida and Broker CRM. Alongside these, the established players such as 1st - The Exchange, Focus and IntelliFlo have been extending their reach, while systems like SSP, JCS and Plum have also been revamping their solutions. It could be argued that the market has become overcrowded and we have been predicting consolidation amongst the existing players for some time, (AT8 has just produced a report analysing the various vendor's solutions).
The process of consolidation began last year with the merger of two of the biggest players in the Mortgage market - Trigold and Crystal and this week accelerated with the acquisition of N4 Solutions (N4) by 1st - The Exchange.

1st - The Exchange: The Company

1st - The Exchange is the combination of what was 1st Software and The Exchange trading platform. As individual organisations, they were market leaders for providing technology to the financial services market place. The acquisitions by Vertex brought together a number of the leading technology brands; most notably Adviser Office - the most commonly used back-office solution in the market - and Exweb the largest IFA Portal in the market.

The Exchange had a turnover of £18m and profit after exceptionals £4.7m (March 2009). 1st had a turnover of £14.3 and a profit after exceptionals of £5.5m (March 2008).

More recently, LDC purchased a majority stake in the company for £42m and gave its backing to invest further in their products and services, along with the potential for further M&A. N4 is the first of these acquisitions that quickly followed the recent buyout by management (MBO) of N4 from Experian.

1st - The Exchange: The Products

1st - The Exchange has a number of major industry products including:

Adviser Office
Adviser Office from 1st - The Exchange is a ‘desktop' [offline] application that claims to be the benchmark client management system for the financial services industry, with over 1,600 firms and 13,000 users. It is functionally very rich, covering Factfind, Financial Planning, Portfolio Management, Life & Pensions, Employee Benefits, Mortgage Tracking, Financial Reporting, Document Management, Automated Letter Writing, Business Processing, e-Business, Lead Tracking, Commission & Fee Accounting, Compliance Process & Monitoring, Business Reporting, Database Marketing & Mailing.

Adviser Evolution
A Point of Sale solution designed to support mobile salesforces, that has an offline architecture but is capable of operating online and is aimed at automating the larger distributors' point of sales processes.

OfficeWeb
Another back office system (originally from The Exchange), but this one is aimed at those larger (100+) adviser Firms and Networks that have ‘unique processes' and require a system that can be heavily tailored to meet their specific process requirements.

Exweb (Portal)
The most comprehensive, online trading portal for the UK FS industry. It covers a wide range of product areas including life & health protection, pensions, investments, mortgages and general insurance. Its primary business function provides comparative and single company illustrations across key product areas. Most important, it is supported by the majority of the UK's major product providers, giving it what is still a dominant position.

Advice Navigator
An online offering that streamlines the advice process - aimed at direct to consumer selling of financial services.

1st - The Exchange: The Solution Gaps

There have been a number of weaknesses in the offerings from 1st - The Exchange including:
1. Lack of an online solution for the adviser market
2. A weaker point of sale offering for Corporate clients (Adviser Evolution failed to gain traction in this space)
3. Lack of experience in delivering to large Corporate/Enterprise clients.
4. The lack of a clear joined-up sales message across the various disparate product offerings - which often overlapped/competed with each other
The acquisition of N4 should help to address the top three issues but depending on how well it integrates N4, the fourth issue may be either resolved or exacerbated. There is a major rebrand that has been in the pipeline for the last few months to bring these brands together and it is our understanding that this has been delayed to ensure the N4 products are included. This may help resolve the issue four.

N4 Solutions

N4 Solutions was founded in 1999 by a management group with a successful track record and knowledge of the financial services industry.
Rapid initial growth led to the company having 100 staff based in their ‘rural' offices near Cirencester. The vast majority of staff has expertise in mortgages and financial services, as well as business consultancy and technology. The company considers itself to be stable, secure and successful. Based on the financial performance of the company, this view does not seem unreasonable.

In July 2007 N4 was acquired by Experian for ‘an undisclosed sum' (believed to be between £20 and £30 m)! There does not appear to be any specific figure available and even the Experian accounts that refer to acquisition expenditure of $1.7bn only highlights two specific figures and groups N4 under ‘other'.

N4 produces and submits full audited accounts to Companies House (auditors are Baker Tilly). The company's financial results for the year to March 2009 are a turnover of £13.8m up from £9.5m (a 45% increase) and a profit after tax of £3.5m from £1.2m (a rise of 178%). Its Net Assets were £10m and employee numbers were up from 66 to the 84 referred to above.

The justification for the acquisition appeared to be the bringing together of N4's vertical market expertise with Experian's market-leading ability in application processing and decision analytics, along with lead generation and property valuation models. N4 had a number of successes under the Experian umbrella including projects at Nationwide and Aviva but didn't achieve (and arguably didn't strive for) wider market positioning. N4 continued with an entrepreneurial drive which was beginning to look uncomfortable in the very corporate Experian family and a Management buyout of N4 was done in April 2010. Less than two months later, the management team sold the company to 1st - The Exchange.

The N4 / 1st - The Exchange marriage

When LDC took over 1st - The Exchange it was clear that they were positioning themselves to invest further in creating a substantial technology player in the financial services market. The N4 acquisition is the first step of what may or may not be others in order for them to achieve their vision.

N4 brings with it substantial Enterprise experience of success which 1st - The Exchange has lacked. N4 has delivered some large projects including a substantial project at Nationwide. However, they - like others - have had difficulties and ‘expectation gaps' to manage with big implementations.
N4 and 1st - The Exchange have worked together on several large projects in the past including Intrinsic and Norwich and Peterborough where N4's POS system was integrated to Officeweb. These projects appear to have gone well and should bode well for the integration.

At Nationwide N4 delivered a mortgage origination system and this mortgage capability will have been of real interest to the 1st - The Exchange management. 1st - The Exchange has been promoting consumer facing solutions to the lenders and the ability to include the origination piece will greatly enhance their offering in this space.

Adviser Evolution - the POS system - from 1st - The Exchange has struggled to gain traction in the market and N4 has a strong POS offering, supporting mortgages as well as life products, (although it appears less productised than most). The N4 solution gives an online alternative to Evolution that is badly needed although 1st - The Exchange a keen to point out that they remain committed to Adviser Evolution despite the acquisition.

For several years 1st - The Exchange has had too many products, gained through acquisition that have not been rationalised into a single branded, joined up solution. It should be possible to merge the solutions into a single family as the solutions already link up at client sites and largely complement rather than overlap. However, the track record of addressing this issue remains a concern that this will not be done in a timely manner. If properly adopted, the N4 acquisition has the potential to be the strategic solution and justification to ‘retire' the other product entities gracefully, but it could also further exasperate the confusion of product strategy and choice - time will tell.

Taken as a whole the acquisition makes a lot of sense. It gives 1st - The Exchange parts of the application stack of a distributor that it didn't address well. If the right focus is given to making the integration work it should enhance both parties position in the market. We await further signs of progress with great interest.