In case you've been living under a rock for the past week, Envestnet shelled out almost $600 million to purchase data aggregator Yodlee. The reverberations from this deal are still making their way across the industry.
After spending about a year talking about licensing deals and partnerships, Envestnet CEO Jud Bergman came to the conclusion that Yodlee's stock price did not reflect the true value of their assets and that it would be worth a lot more if it were integrated into the Envestnet ecosystem.
So he got out his checkbook.
In purchasing Yodlee, Bergman grabbed their network of over 14,000 data sources and their 72 patents. Also their 1,000 employees worldwide, who generated revenue of $98.6 million for the 12 months ended June 30, according to RIABiz. That would add almost 20% to Envestnet's annual revenue of around $400 million.
However, the market reacted negatively to the acquisition, driving down Envestnet shares by 30% on the day the deal was announced, wiping out the 22% gain from all of 2014. Institutional traders believed that Envestnet overpaid for Yodlee and they voted with their wallets by dumping Envestnet stock.
They couldn't be more wrong.
In this article, I list five reasons why the Envestnet acquisition of Yodlee was a brilliant idea and how it could be a game changer in the wealth management industry.
The Envestnet Acquisition of Yodlee
So why exactly did Envestnet part with $590 million of cash, stock and newly issued debt to buy a company that just compiles other people's data? Anil Arora, Yodlee’s chief executive, told the NY Times "that the decision to sell was driven simply by a recognition that putting the two companies together would help independent financial advisers compete against their rivals."
But this doesn't explain why being acquired by Envestnet, which has the potential to jeopardize their relationships with other vendors in the wealth management space, was a better route for Yodlee than staying an independent and publicly-traded company.
We've all heard the old saying, "Why buy the milk when you can get the whole cow for half a billion dollars (more or less)?"
— WealthManagement.com (@wealth_mgmt) August 10, 2015
Here are the 5 reasons why the Envestnet acquisition of Yodlee was brilliant:
1. They Can Stop Using Competitor's Products
Data aggregation services have almost become ubiquitous in wealth management, especially for technology-heavy firms like Envestnet. Now that they own Yodlee, Envestnet will make sure all of their other business units switch their data aggregation services to the in-house brand.
While the concept of 'frenemies' and 'coopetition' is rampant in the industry, with many firms buying products and services from firms that they compete with in other markets, it's always advantageous to try and reduce or eliminate your reliance on competitors for key pieces of your infrastructure.
The Envestnet | FinanceLogix team will have some work to do as they are users of aggregation services from both ByAllAccounts (owned by Morningstar) and CashEdge's AllData (owned by Fiserv). I tweeted about this when I attended the Envestnet Advisor Summit back in May. (See Envestnet Advisor Summit 2015 Fast Twitter Recap – Day 1)
— Craig Iskowitz🥋🎷 (@craigiskowitz) May 8, 2015
Now some of their competitors will be put in the same position, but without an in-house option to switch to.
Envestnet's purchase of Upside Advisors back in February put them in direct competition with the greatly growing gaggle of robo-advisors who are burning through VC funding in order to destroy the traditional advisor model or enhance it with online, low-touch offerings.
According to Bill Winterberg, Personal Capital, Blooom, Future Advisor, LearnVest, and Openfolio all subscribe to Yodlee services to aggregate customer accounts and provide them with reports such as overall net worth, cash flow, asset allocation and portfolio performance. (See Robo-Advisors Shakeout: Who Will Be The Last One Standing?)
While most of the industry has realized the tremendous benefits of account aggregation software, some players choose to stay old school when it comes to gathering information on their clients' outside assets. Check out Vanguard's manual data entry screen.
2. It Will Help to Differentiate Their Platform
What Bergman and his team have realized is that the ability to gather information across the entire spectrum of a client's financial life, including investments, checking and savings, 401(k), credit cards, etc. can provide tremendous value at many points in the wealth management life cycle.
And if Yodlee has built one of the best solutions, it makes sense to buy them rather than become just another one of their partners. As the owner, with direct access to Yodlee's developers and code base, Envestnet can figure out how to enhance their offerings in ways not available to clients.
Every wealth management platform vendor is striving to differentiate their offering from the rest of the pack. It's no longer enough to just have a proposal generation, new account opening, model management, portfolio construction, rebalancing, trading, and performance reporting. So why choose one vendor over another? As a vendor, you want to have something that the other guys don't offer, or better yet, can't offer. Otherwise, your product becomes commoditized and you're stuck competing on price. You only have to look at the Race to Zero that robo-advisors have launched to see where that story ends. (See 4 Robo-Advisors Go Head-to-Head at T3 Conference)
Envestnet has not only proven to be successful at convincing advisory firms to use their platform, but they have been able to generate steady profits at the same time.
Back in 2Q 2014 they had a measly $65 million in cash and equivalents, but by 2Q 2015 they had grown their hoard to almost $200 million.
And it was burning a hole in Bergman's pocket.
Cash sitting in the bank doesn't do squat to increase revenue, improve customer service or build better products. Putting it into play by purchasing a company with cutting edge technology and lots of growth potential is an excellent way to do all of those things.
While the market turned it's nose up at this deal, in a few years, I predict it will be looked upon as one of the steals of the century in financial services M&A.
4. Yodlee Comes With a Blue Ribbon Client List
Previous Envestnet acquisitions have provided them with a foot in the door of a lot of clients they were having trouble gaining access to in the past. Tamarac delivered 500+ RIA firms while Placemark Investments counted Royal Bank of Canada, Bank of Montreal and TD Ameritrade among their customers. (See Envestnet buys UMA Experts Placemark Investments for $66 Million)
Yodlee has built an impressive list of name brand clients like 11 of the top 20 banks, including Citigroup, Bank of America, J.P. Morgan Chase and HSBC. These firms control a large percentage of the retail banking market, which was a space in which Envestnet did not have a presence.
Financial service conglomerates like USAA (over $140 billion AUM) use Yodlee to pull information about clients' financial lives to help them make better investment decisions.
Also, asset management firms such as Point72 Asset Management LLP (formerly SAC Capital Advisors) and Tiger Global Management pay millions for subscriptions to Yodlee's services.
These are clients that Envestnet might never have been able to sell into on their own. Now they will be delivering a service that not only is highly valued and generates a steady stream of revenue, but can't be easily replaced by other vendors.
That gives them pricing power.
Yodlee pulls in around $10 million annually from selling data. Envestnet will probably look to raise prices to take advantage of their leverage since it will take years before competitors can build up their data sets to rival Yodlee's.
Plus, they will now have a vendor relationship with clients, like retail banks, that currently use software from rivals Pershing, Fiserv and Charles River in their wealth management business. I'm sure Envestnet relationship managers will be working their new contacts as soon as they are able in order to get the ENV2 platform in front of decision makers.
5. They Now Own The Yodlee Database
As Michael Kitces points out on his blog, Nerd's Eye View, Yodlee's massive database of consumer financial information is a veritable treasure trove. Hedge funds, asset managers and trading firms pay through the nose to get access and drive their analytics in order to spot market trends and generate trading ideas milliseconds before their competition.
According to an article in the Wall Street Journal:
Hedge-fund executives and people familiar with Yodlee say its data product is one of best and priciest available to investors, reflecting a growing strategy by information gatherers to cash in on “exhaust,” or data collected while doing other business.
Kitces explained another benefit of this new data source:
Earlier this year, Envestnet announced the launch of Envestat, its industry analytics platform to study industry and client trends. Given Envestnet’s incredible reach across advisory channels and platforms, the company arguably already had one of the broadest cross-channel data sets of advisors. But with the acquisition of Yodlee, Envestnet has the potential to go far deeper in its data analytics.
In my opinion, Yodlee is just scratching the surface of analytical services that can be driven by their enormous data set.
For example, imagine if the Tamarac platform could alert an advisor that a client has a CD coming due. Or analyze their 401(k) and provide better mutual fund options that they could charge advice on. Or give them a heads up that there is cash sitting in a held away account that should be invested. Or dozens of other tidbits of information that will deepen the relationship between the advisor and her clients and make their services stickier and harder to replace.
This will be especially useful as robo-advisors start to expand their offerings beyond simple asset allocation and baskets of ETFs. They will be moving into more complex securities and account types as well as providing basic financial planning and their own automated advice on outside accounts.
The other big player in personal financial data agent is Intuit's Customer Central, which powers the data aggregation services at Mint.com. Customer Central was itself built on top of an acquisition that Intuit made back in 2005 of a company called Teknowledge.
Traditional advisory firms need a technology and investment partner that can meet their needs now and into the future. Envestnet has just placed themselves in a terrific position to deliver.
— MichaelKitces (@MichaelKitces) August 11, 2015
Envestnet's Acquisition of Yodlee Was Brilliant
How many of Envestnet's competitors are kicking themselves right now that they didn't pull the trigger first and snatch up Yodlee when they had the chance? They missed out on having an in-house premier data aggregation solution and being able to stop paying their competitors. They will have a harder time leveraging aggregation services to differentiate their advisor-facing solutions. They'll have to find something else to do with their cash (assuming they have any) that won't provide the ROI that Yodlee will. They lost out on snagging Yodlee's client list and their gargantuan database and the endless hidden gems of revenue that Envestnet will soon be mining.
— Envestnet (@ENVintel) August 11, 2015
In the end it's all about the client. What the client wants. What the client really needs. What the client's user experience will be so they turn into evangelists for your firm. This is the focus companies will need in the wealth management space if they expect to succeed. Envestnet is making a play for the #1 spot. How the rest of the industry responds will determine who will still be relevant players 3-5 years from now.