BREAKINGVIEWS-Nasdaq paying price of dealmaking gone wrong
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Antony Currie
NEW YORK, April 2 (Reuters Breakingviews) - Nasdaq OMX (NDAQ.O) may be paying the price of dealmaking gone wrong. Nearly two years after failing to supersize itself by acquiring NYSE Euronext's NYX.N equities business, the bourse is aiming smaller with a $750 million plan to buy eSpeed, an electronic bond-trading operation. Investors erased 90 percent of the price tag from Nasdaq's market value. The excessive skepticism ignores the target's income and the buyer's cost discipline.
It's an expensive deal, for sure, at almost 11 times last year's EBITDA. True, it's less than the 13.3 times of trailing revenue Thomson Reuters (TRI.TO)(TRI.N) – the parent company of Breakingviews – paid for FXall, an electronic foreign exchange service. And corporate bond electronic trader MarketAxess (MKTX.O) is trading at almost 15 times. For Nasdaq, however, which is valued by the market at just six times EBITDA, it's a pricey acquisition.
Moreover, the real prize of owning eSpeed will come from expanding into other fixed-income products like corporate bonds. There is a lot of pressure for these markets to go electronic. Wall Street needs to cut costs. And new capital charges have prompted banks to create markets in fewer products, making it harder for investors to trade.
Competition is of course rife. Aside from MarketAxess, most banks are trying to push electronic bond trading, the NYSE is rolling out products and bondholders like BlackRock (BLK.N) are developing platforms. So, too, are non-bank and non-asset management players like TradingScreen.
The crowded marketplace makes shareholder wariness understandable, though they could be overlooking some important aspects. While eSpeed's top line last year, at $99 million, will fluctuate with investor appetite, it shouldn't suddenly dry up. Nor is the company baking new revenue into its assumptions: Nasdaq reckons current volume will be enough to boost its earnings within 12 months.
More importantly, Robert Greifeld's trouble with big deals – in addition to regulators torpedoing the NYSE transaction, he failed in a 2006 bid to buy the London Stock Exchange (LSE.L) – he has proven more adept at smaller ones. The Nasdaq boss also has shown remarkable discipline at keeping costs under control. His 20 percent net margin last year, for example, exceeded the NYSE's 16 percent. Buying eSpeed may not be a game-changer for Nasdaq, but neither is it the disaster investors fear.
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- Nasdaq OMX agreed on April 1 to buy electronic Treasuries trading platform eSpeed for $750 million in cash and an earn-out of up to $484 million in stock. The latter portion is to cover tax benefits from the deal that will accrue to Nasdaq and will be paid to the seller, BGC Partners (BGCP.O), over 15 years.
- Nasdaq expects the deal to enhance its earnings within 12 months. Revenue for eSpeed in 2012 was $99 million with EBITDA of $69 million.
- Nasdaq press release: link.reuters.com/sus96t
- BGC Partners press release: link.reuters.com/tus96t
- Reuters: Nasdaq to buy eSpeed platform for $750 mln [ID:nL3N0CO2FE]
Taking public market private [ID:nL1N0BC88Q]
- For previous columns by the author, Reuters customers can click on [CURRIE/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
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