Although initial reaction to State Street’s $564 million acquisition of Currenex was one of surprise over the price paid, as reported in last week’s Squawkbox, sources close to the companies say that at least two other expressions of interest were received by Currenex over the last few months – both from companies with no FX presence. The sources add that State Street “went in high to seal the deal”.
Cliff Lewis, CEO of Currenex, acknowledges there was “plenty” of other interest in Currenex but stresses his first wish was a deal with State Street. “The time had come for us to move our business to the next stage,” says Lewis. “And this was the partnership we wanted because it is such a good fit. It not only provides us with a stronger global presence but Global Link has great connectivity with the major see side players, and that offers huge potential for our clients.”
Certainly, in terms of client segments and core competencies, the two companies would appear to be a perfect fit, with FX Connect’s heavy asset manager focus and Currenex’s active trader bias.
Simon Wilson-Taylor, head of Global Link, acknowledges that the company’s motivation in completing the deal was to bring together two complementary offerings in the industry. “In many acquisitions there is a huge burden in merging or developing new technology, but here the technology is already proven because we have been working together with two of our clients – so we know we can work well together,” he says.
While he accepts that there will be “some tidying up” related to the purchase, which is expected to close in the first half of this year (the companies hope for around the turn of Q2), Wilson-Taylor points out that a real benefit of the deal is that the firms are able to go straight out and sell a combined product. Additionally, he notes that unlike many acquisitions where staff numbers are typically cut, “I would not be surprised if we add staff rather than cut them – I don’t see any overlap at all between the two businesses.”
Although there is still some surprise at the price paid, which can be put into perspective by noting that FXall, which can in many ways be seen as a direct rival of both FX Connect and Currenex, sold a rumoured 20% stake in the company to TCV for $77.5 million, which valued the entire company at $387.5 million.
In addition, Hotspot, which industry sources suggest sees volumes roughly one quarter of Currenex on an average day, was sold to Knight Capital for, coincidentally, $77.5 million.
Currenex being valued higher than these two platforms is one thing but what has surprised observers is that the price paid was nearly three-quarters that paid for EBS, which transacts more than any other electronic platform in the FX industry (estimated to be at least three times what Currenex puts through on an average day).
Surprise or not, there are aspects of Currenex’s business that have perhaps been overlooked, mainly because the company has deliberately sought to place itself “under the market’s radar”. The company has been cash flow positive for three years, but it is where the cash flow comes from that is important.
The initial instinct is to look at Currenex’s (unpublished) volumes and estimate its revenues from that, but that would be wrong, mainly because Lewis has steadily been reinventing the company as a technology provider with a platform as part of its business.
Sources within Currenex tell Profit & Loss that in recent months the platform has regularly been seeing daily volumes “in excess of $50 billion”. This alone would not explain the price, after all FXall had exceeded this number on a regular basis before TCV bought the 20% stake.
Where the price is perhaps justified is in the amount of business Currenex has been able to attract to its technology services, which is a stronger, more robust revenue stream. It also, which is often overlooked, owns several patents in the trading technology field, which are equally valuable.
Another factor that probably influenced the price was that Lewis is renowned in market circles for running a very tight and business efficient ship with a cost base much below that of its rivals.
As far as Wilson-Taylor is concerned, a key logic behind the deal is that it makes the combined entity “comfortably” the largest platform in the portal industry. There is perhaps more to it than that. Although as a regulated entity, Global Link cannot publish regular volume data, Profit & Loss understands that it is regularly trading around the $100 billion mark on given ays. Together with Currenex’s volumes, a relatively conservative estimate of $110 billion a day puts it close to EBS on a daily average basis (although EBS regularly peaks above $200 billion a day).