New York – Cogent Consulting LLC announced the end of negotiations to sell a majority of the company to a consortium of brokerage firms. According to Robin Hodgkins, President of Cogent Consulting, negotiations were terminated by mutual consent last week. The intent of the acquisition was to create a standardized broker-neutral platform for clients to access their CSA broker information in one consolidated portal on a virtually aggregated basis. Brokerage sources indicate that there is a desire to create a broker-neutral platform, although at this time Integrity Research is not sure what the strategy will be.
Timeline
The idea for a broker consortium first arose in response to counterparty risk concerns arising from the impact on client CSA/CCA balances of broker restructurings and bankruptcies. As we reported in January, there was significant buy-side support for the concept of a broker consortium during a survey we conducted in the fourth quarter of 2008. 39% of survey respondents supported the idea. There was even more support for the idea of an independent firm consolidating CCAs/CSAs (44%).
On March 3rd, we reported that Cogent had announced in a client newsletter that it was negotiating with a broker consortium to be the platform for aggregating CCA/CSA agreements. Cogent issued a press release on May 19th announcing that it had signed a non-binding letter of intent with a broker consortium for the acquisition of Cogent. The participants in the consortium were not disclosed. Cogent issued another press release on June 1st announcing the pending acquisition.
According to the latest press release from Cogent, negotiations were ended by mutual agreement, citing a failure to agree on final terms. Cogent still expects to work with firms which were members of the brokerage consortium through its existing product line. Cogent is unsure whether the consortium will seek to implement a broker-neutral CSA aggregation platform through other means.
Our Take
Acquisitions are an inherently delicate process, and, with multiple acquiring parties, exponentially so. Consortiums are unwieldy to create, although once created they can be extremely powerful. The level of visibility created by the various announcements only added to the pressures on deal making.
Where does Cogent go from here? The centerpiece of the proposed platform was to be Cogent’s CSA Trak BD “Cloud” system, which is a web-based solution offered to brokers to manage client commission pools while also offering a client web site allowing brokerage clients to manage their CSA programs (review and approve invoices, view trades, download statements, and see their available CCA/CSA funds to use for payments.) The client portion was going to be given to consortium clients for free, giving clients the opportunity to manage multiple CSA agreements in one platform. The CSA Trak “Cloud” still offers clients the same aggregation capabilities, but it does not yet have the critical mass that the consortium would have offered.
Cogent says it has over a dozen brokers currently licensing the cloud version of CSA Trak BD. In other words, clients of Broker 1 can aggregate CSA balances ( and review and approve invoices, view trades, download statements, and see their available CCA/CSA funds to use for payments) for Brokers 2 through 12 using the product. Cogent says it has 65 – 75 brokers using the ‘light’ version of the system which facilitates payments. The biggest benefit of the consortium would have to dramatically increase the number of brokers (and clients) using the cloud version. But Hodgkins sees this as a matter of timing: “[the end of negotiations with the consortium represents] a slowdown in the rate of growth, nothing more than that.” Still, Hodgkins expects Cogent’s revenues to grow over 50% this year.
Whither (wither?) the Consortium
Where does the brokerage consortium go from here? The deal with Cogent addressed an important issue for clients, which is ease of use. Currently clients must log into the commission management websites for each of the brokers they have CSA agreements with. If it is 2 or 3 brokers, this is not overly burdensome but by the time you get to 12 or more CSA relationships, which many of the larger multi-region asset managers have, it becomes a major chore. Virtually aggregated balances make administration far easier for clients. Cogent offered an immediate solution. As we have mentioned in previous posts, TheMarkets.com, itself a broker consortium with its own broker vote platform, could be a contender. There may be other technology solutions as well.
What the Cogent deal did not address was counterparty risk, which, in our view, was the initial impetus behind the consortium concept. At least not directly. Since the onset of the financial crisis, clients have expanded the number of CSA brokers they use, increasingly favoring agency and regional brokers. The logic has been that 1) agency brokers and regional brokers do not have the same complexity of business models as the bulge firms and 2) multiple CSA balances reduce the concentration risk with any one counterparty. Improved administration addresses the problem of multiple CSA brokers but does not solve counterparty risk per se.
Integrity Research believes that client concerns about CSA counterparty risk will abate for three reasons: 1) the current proliferation of CSA broker counterparties (reducing concentration risk); 2) an expected ruling from the SIPC clarifying that client balances tied to Client Commission Arrangements (CCA’s) and soft dollar accounts should be viewed as client assets and exempted from bankruptcy; and 3) improved financial strength of financial counterparties generally. If so, the impetus behind a broker consortium may wane as well.
The Cogent press release announcing the end of negotiations is reproduced below:
Cogent Consulting and Lead Brokers End Negotiations
Summit, NJ, June 29, 2009–Cogent Consulting LLC of Summit, NJ, a leading developer of
commission management systems for the securities industry, today announced that negotiations
regarding a potential sale of the majority of the company had been terminated.
“While the parties to the transaction worked hard to reach final agreement and close a
transaction, at the end of the day we were simply not able to agree on final terms,” said Robin
Hodgkins, President, CEO and founder of Cogent.
“The merits of a broker-neutral solution for CSA management are as clear and strong today as
they have ever been. Cogent plans to continue its program of leveraging its technology to assist
institutional investors, hedge funds, and the brokerage community in all aspects of valuing and
paying for proprietary and independent research.”