Behind Fidelity's Black Knight Maneuver

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"This could be an opportunity for them to pick up even more market share," Kite says. "I see this as an opportunity for Fidelity to build a really good end-to-end solution."

Craig Hughes, managing director of financial services consulting at CC Pace, says strategic goals drove the deal, rather than cost, noting that Fidelity bought LPS back for a price that's not far off from what LPS was worth when it first became a standalone company. "It's not like they sold high and bought low. It just made sense structurally," he says.

Fidelity's penchant for spinning units off and then repurchasing them reflects the philosophy of Fidelity's board, led by Chairman William P. Foley II, to take advantage of any opportunities that can provide value to shareholders.

"If something makes sense to them financially or structurally, to bring something back that they have spun off, then they'll do it," Hughes says. "Ultimately, I believe that Foley is a smart businessman and he doesn't do things that don't have strong value to shareholders, so there has got to be a strong financial piece to it."

Fidelity probably hopes the creation of a consolidated technology unit will spur organic growth, Hughes says, noting the loss of the LPS assets previously may have eliminated cross-selling potential.

But the deal does come with some risks, Hughes says. LPS ran into regulatory trouble in the wake of the financial crisis. In January 2013, LPS agreed to pay $127 million in a multistate settlement of claims that it forged documents that were used to foreclose on homeowners.

"I'm hoping this reorganization and change doesn't introduce structural problems into the organization," he says.

Mark Dangelo, president of MPD Organizations, who has written a book on post-merger and acquisition challenges, says in an e-mail interview the LPS acquisition is likely driven in part by a desire among lenders to seek larger service providers to "reduce vendor relationships and points of risk."

The more volume Fidelity retains from large lenders, the better its chances of maintaining or increasing margins on a per-loan basis, he adds. It also spreads the cost of research and development across more loans. But he expressed some skepticism about the benefits of these economies of scale going forward.

The low rate of household formation in recent years may portend a lower "new normal" for mortgage origination volume, rather than an aberration related to the Great Recession, he says. If origination volume does remain lower than in the past, that may undercut the financial assumptions made in any predeal targets for the combined entity's performance.

Dangelo also isn't convinced that the "bigger is better" model for mortgage technology providers will prove persuasive in the market. Historically, smaller firms often are better at "point-solution innovation" than larger ones, he says.

He doubts the Fidelity purchase of LPS and creation of a new technology and analytics company will have much impact on what offerings are available to lenders, at least in the near-term.

"There are a lot of 'Doubting Thomases' who think that this new iteration of the 'old family' assets have been just recast into a new brand and offering envelope but remain essentially the same," he wrote.

Because of Black Knight's size, it has the potential to force smaller players to broaden product lines and enhance integration in response to its vast resources.

"As we have seen, those who can act upon their assets within a big or vast data world stand to benefit their clients the most Black Knight has the potential, but execution and attention to detail in a post-deal M&A world is imperative," Dangelo says.

That could force smaller vendors and outsourcers to "form strategic or exclusive alliances, or joint ventures, to compete against the scale," of Black Knight.

Another risk for Black Knight is that a company whose core is the MSP servicing system that's known more for its consistency, audit capabilities and reliability more than its innovation, could prove too risk averse to compete with smaller, more nimble competitors, Dangelo says.

Time will tell whether Black Knight Financial Services can capitalize on its ability to touch virtually any part of the mortgage market. But the reunited Fidelity and LPS has the potential to change the dynamics of how lenders and servicers work with their technology and services partners.

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