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TECH NOTES - Force Dubai

To its exchange ambitions, the Middle East market adds a technology dimension.

THE DUBAI INTERNATIONAL Financial Centre, set up five years ago by the oil-rich emirate to build a world-class capital market, struck the stock exchange equivalent of a gusher in September. DIFC’s securities-market holding company, Borse Dubai, resolved a fight with the Nasdaq Stock Market for control of Nordic Exchange operator OMX by agreeing to buy a 19.9 percent stake in Nasdaq, which in turn will acquire OMX for $4.9 billion. Also in the bargain: Nasdaq gets one third of Dubai International Financial Exchange, a subsidiary of Borse Dubai, which in turn ends up with the 28 percent of the London Stock Exchange that Nasdaq had accumulated in its unsuccessful bid for control of the world’s No. 2 exchange in terms of market capitalization.

It’s all quite a coup for Dubai, which reaches well beyond the Middle East as it seeks to outcompete regional rivals in Bahrain and Qatar, and for Per Larsson, the chief executive of Borse Dubai and former head of Stockholm-based OMX, who has spearheaded the acquisition strategy.

But there is more — and different — deal making to come. Omar bin Sulaiman, chairman of the DIFC’s investing arm, DIFC Investments, said at a symposium in Dubai last month that he is looking at potential Asian exchange investments, but a deal announced November 12 indicates that the action will not be limited to exchange purchases.

Eyeing a different part of the financial transaction chain, DIFC Investments agreed to pay Boston-based private equity firm TA Associates £200 million ($414 million) for SmartStream Technologies, a London-headquartered middle- and back-office transaction management software company with 400 employees, £47 million in annual revenue and 1,000 bank, asset manager and hedge fund customers around the world.

Add SmartStream to the Borse Dubai–Nasdaq complex — complete with OMX’s technology business that supplies trading systems to exchanges in more than 50 countries — and Dubai is well on its way to assembling a complete menu of trading and posttrade systems and services. That puts it in a position to compete not just against other exchange infrastructures but also alongside specialized financial market technology providers, such as CheckFree Corp. and SunGard Data Systems.

DIFC says that it “aims to create a new generation of hosted information and trade processing services,” and that SmartStream will be “at the heart of the secure, scalable trade processing and data management platform it is building.” According to a DIFC Investments spokeswoman, other acquisitions “are being considered.”

Dubai is smart to push the technology lever, particularly in the critical but unglamorous middle- and back-office realm, says William Cline, managing partner of New York–based consulting firm Acai Solutions and a veteran of major exchange technology projects earlier in the decade as a senior capital markets consultant with Accenture. As trading increasingly transcends asset classes, borders and liquidity pools, financial firms’ technologists are focused on upgrading front-end order management systems or execution management systems. Meanwhile, exchanges are weighing system alternatives such as those of OMX and Deutsche Börse Group’s Xetra and forming multinational strategic alliances to prepare for global trading. In Cline’s view, both front-end technology choices and the interpersonal relationships underlying exchange alliances are notoriously fluid. By contrast, he says, the reconciliation and exception processing supported by SmartStream “is sticky and far more difficult to swap out than front-office systems.” SmartStream’s customer retention record bears that out. Alastair McGill, the company’s head of global marketing, says that its attrition rate is in the “very low single digits” and that most contract cancellations occur when two customers merge.

McGill adds that SmartStream’s license revenue has grown at a compound annual rate of 24 percent over the past three fiscal years (ended June 30). In view of that performance, DIFC Investments is keeping in place the SmartStream management team led by CEO Kenneth Archer, a former Computer Sciences Corp. executive brought in 14 months ago by TA Associates. DIFC Investments managing director Bisher Barazi says that it has “exciting plans for future development in what is the world’s largest information technology market — financial services technology.”

Technology analyst Larry Tabb, founder of Westborough, Massachusetts–based TABB Group, wonders if DIFC will manage SmartStream more as a private equity portfolio holding than as part of a business strategy. Either way, he says, “Dubai is a player and not to be taken lightly. Whatever the end goal is, it will result in a much bigger whole than what they have today.”