Mergers and Acquisitions Bode Well in the Long Term

Mergers and acquisitions are emerging as an effective way mortgage servicing technology providers streamline separate tools into larger more compatible systems.

John Guzzo, managing director at BerkeryNoyes, a New York-based investment banker and a mergers and acquisitions expert, said due to the crisis private equity investors have been fairly quiet in the past two and a half years. But it has started to change as some “relatively restless investors” are becoming more active and opening new investing opportunities for mortgage technology vendors.

“We are about to embark on a buying frenzy. There is a window of opportunity over the next six to 24 months to either acquire or sell all or part of a business.”

Strategic financial buyers, such as private equity funds may be interested in mortgage-specific investing—both individuals and institutions that have funds available, or alternative investors such as hedge funds and institutional investors. BerkeryNoyes mostly represents privately held owner-operated businesses serving as an intermediary from the seller side.

Guzzo told this publication that about 200 vendors are now active in the mortgage market space offering various options including end-to-end origination to foreclosure software options. “In two years the vendor landscape will look much different and most strategic buyers would have acquired what they needed.”

The typical mortgage sector entrepreneur knows the market, he says, but for an acquisition of merger to be successful, they need to specify the qualities and features they are looking for in a company that would match their partnership requirements. It is also important “to market a company the right way” so it is well positioned when competing for buyers or investors. And the best way to make a firm attractive to buyers is by offering “a healthy” or an attractive price.

According to Guzzo, companies like Ellie Mae have been very active investors in the mortgage space. Overall there are more deals happening in the midtier market among companies worth $15 million to $500 million in assets, he says.

Since investors’ strategies are for the long term, more deals are being closed in the origination space and the reason behind that development is an effort to implement strategies that will also be effective in the long term.

Plus, the mortgage servicing shop operations of today are busy managing loan management requirements that traditionally were handled by originators, these new acquisitions are expected to serve well both the servicing needs of today and in the future. Buyers are trying to develop systems they can use in the near future “once originations start to pick up again.”

There is one major challenge, however, Guzzo says, “It is a very fragmented market.” Vendors need be aware that in the mortgage technology market space service quality and innovation overrates company size. “You do not have to be a very large mortgage technology vendor who is making a lot of money to be very attractive to a buyer,” he says.

Because most investors are focusing on the long term and the goal to create end-to-end solutions, platforms that add to existing overall systems, or “the critical mass” are more valuable investments. Many of these companies may operate up to $15 million and only generate enough revenue to break even on profits or be just slightly profitable, Guzzo says. Investors see benefits in the fact that they pay an initial fixed cost and than variable costs when they sell and resell these companies.