Dear Clients and Friends,
Our latest Fintech m&a report can be found here. It highlights m&a trends and transactions in the seven segments of the Fintech world that we follow and sometimes lead.
One of those sectors is made up of firms that facilitate the trading, settling and clearing of securities trades – “Securities Exchanges”. As you will see on Page 15, enterprise-value-to-revenue multiples in this segment are among the strongest of any segment we follow.
The average company on the S&P 500 trades at around 2.2x revenue. Canada’s TMX Group trades at about 6.7x 2018E revenue; NASDAQ trades at about 7.3x; LSE is at 7.9x; and ICE trades at 10.0x 2018 revenue. Why such high multiples for a segment that “everyone” says is commoditized – in which “everyone” says margins are being squeezed towards zero? Three reasons:
First, modern securities exchanges are financial technology companies with high levels of “recurring revenue”. Nearly 90% of trades are executed automatically by robots (“algorithms”) and most of the rest is electronic. As the NY Times says: “…robots have been marching into Wall Street for years. That’s especially the case in stock trading…” Firms like this can have high profit margins.
Second, modern security exchanges are leveraging their brand and expertise to become information technology companies. NASDAQ’s recent $705M acquisition of eVestment is an example – bringing in a content and analytics provider used by asset managers, consultants and asset owners to facilitate institutional investment decisions. In that same vein, LSE recently bought The Yield Book – Citi’s bond and data and indexes business for around $685M. And then there is ICE’s series of acquisitions including its $5.2bn purchase of Interactive Data.
Third, in spite of the common wisdom, the combination of tech and brand leverage has made most securities exchanges quite profitable – and in that context, their values look much more reasonable. The average information technology company in the S&P 500 trades at just under 15x LTM EBITDA. NASDAQ with 51% EBITDA margins trades at 14.2x 2018E EBITDA; LSE, with 53% margins, trades at 15.0x; TMX, with 57% EBITDA, trades at 11.6x; ICE, with a whopping 63% EBITDA margin trades at 15.7x 2018E EBITDA.
The key to the future for securities exchanges – and for much of Fintech – is more use of modern technology to bring efficiency to their customers; more focus on value-added information content and analytics aimed at helping their core market make better decisions; and a constant push to increasing profitability – especially as top-line growth slows. If the exchanges – and other Fintech firms can keep pulling it off they will continue to be the highly valued businesses we see today.
A few recent interesting fintech transactions include:
• Francisco Partners (San Francisco, CA) agreed to acquire VeriFone (NYSE:PAY) for $2.6bn, implying an enterprise value of $3.3bn and valuing the company at an implied 1.8x LTM revenue and 14.6x LTM EBITDA,
• TransUnion (NYSE:TRU) agreed to acquire Callcredit Information Group for £1bn (~$1.4bn),
• Revolut (London, United Kingdom) raised $250mm in a Series C round of funding led by new investor DST Global, and including existing investors Index Ventures and Ribbit Capital,
• OnDeck (New York, NY) raised $100mm in a debt funding round from undisclosed investors.