Envestnet cloud-based software a lure for bids

The maker of cloud-based software used by financial advisers, has increased its value fivefold since going public. Buyers may take notice.

Mar 25, 2014 @ 3:26 pm

Envestnet Inc. (ENV), a maker of cloud-based software used by financial advisers, has increased its value fivefold since going public. Buyers may take notice.

The $1.46 billion company serves advisers at Fidelity Investments, Fifth Third Bancorp and other banks and broker-dealers that use its technology to keep track of more than $500 billion of investments. Its expanding clientele could appeal to a competitor such as SEI Investments Co. or financial data vendors such as FactSet Research Systems Inc. or Fiserv Inc. said Barrington Research Associates Inc.

Companies are turning to Web-based applications, or software-as-a-service, to reduce the need for servers and other hardware on their premises. That's part of Envestnet's appeal, Oberweis Asset Management Inc. said. Envestnet is aiming to boost revenue 20% a year for the foreseeable future, and analysts see sales climbing at almost double the average pace of software peers, according to data compiled by Bloomberg.

“Software-as-a-service is one of the hottest areas” for acquisitions right now, David Covas, a Lisle, Illinois-based money manager at Oberweis, said in a phone interview. Oberweis owns Envestnet stock among the $1.5 billion of assets the firm oversees. “Envestnet is one of the premier players in the space and one of the only ones with a cloud-based offering. Their growth has been fantastic.”

CLOUD DEMAND

Last year marked the biggest buying spree for Web-based software makers since 2007, with about $16 billion of deals, data compiled by Bloomberg show.

Judson Bergman, a former managing director of mutual funds at Nuveen Investments Inc., founded Envestnet 15 years ago. Since the company first sold shares in July 2010 for $9 apiece, the price has swelled to more than $40, while the company's market value has soared from about $270 million.

Over that time, revenue more than doubled to $243 million, a majority of which came from fees based on assets under management.

Envestnet serves both independent investment advisers as well as large institutions such as Fidelity, which is the company's single largest customer, accounting for 20% of sales. Other users include Bank of Montreal, Robert W. Baird & Co. and Sterne Agee Group Inc., according to a company presentation this month.

Envestnet's software provides advisers with access to more financial custodians, such as Charles Schwab Corp. and TD Ameritrade Holding Corp., than its competitors, the company said in a filing. That's a plus for advisers who tend to work with more than one custodian, according to Jeff Houston, a managing director and analyst at Barrington Research in Chicago.

“Just the sheer number of relationships that it has with financial advisers is really attractive to a lot of different companies,” Mr. Houston said in a phone interview. “Its independence -- how it sits in between all the different custodians -- is attractive as well.”

Dana Taormina, a spokeswoman for Envestnet who works at public-relations firm JCPR, declined to comment on whether the company has been approached by suitors.

SEI Investments would be a logical acquirer, Mr. Houston said. The $5.8 billion company provides asset-management technology and competes with Envestnet.

“I'm sure it's on their radar screen,” he said.

FactSet, which has a market value of $4.6 billion, and $14 billion Fiserv are among the financial data providers that also could be interested in buying Envestnet to expand into software for financial advisers, according to Houston. FactSet (FDS)'s customers currently include fund managers, analysts and bankers, while Fiserv's payment and processing systems are used by banks, investment management firms and retailers.

Bloomberg LP, the parent company of Bloomberg News, competes with companies such as FactSet.

Dana Grosser, a spokeswoman for Oaks, Pennsylvania-based SEI Investments, and Michael Amenta of Norwalk, Connecticut-based FactSet, said the companies don't comment on takeover speculation, when asked whether they're interested in buying Envestnet. Britt Zarling, a spokeswoman for Fiserv in Brookfield, Wisconsin, didn't return a phone call or e-mail requesting comment.

A buyer would get a company that's projected to boost revenue 66% to $403 million over the next two years, according to analysts' estimates compiled by Bloomberg. That compares with an average growth rate of 37% for U.S. software companies that are valued at more than $1 billion, data compiled by Bloomberg show.

Getting hold of Envestnet's growth won't come cheap. Its price-sales ratio reached a record 6.6 in January, versus a multiple of about 3.7 for software stocks in the Standard & Poor's 500 Index, the data show.

As Envestnet continues to grow and meet its goals, management and shareholders may demand a high price to agree to a sale, said Mr. Covas of Oberweis.

“When companies have so much growth in front of them, they're not as excited to sell out,” he said.

(Bloomberg News)

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