Inter-dealer broker Icap responded to press speculation and a subsequent movement in its share price by confirming that it is in preliminary discussions with EBS regarding a possible acquisition.
“Discussions are at an early stage and there can be no certainty that a transaction will take place. A further announcement will be made in due course,” Icap said in a statement. EBS declined to comment on the reports.
The confirmation of the talks represent a step up in the long running saga of EBS’s future – rumours surrounding a sale have done the rounds at regular intervals over the past few years, although sources close to multi-bank owned EBS, tell Profit & Loss that the decision to crystallise the owners’ investments in the company was made at the end of last year when it became apparent that there were several potential suitors interested in expanding their FX franchise.
These suitors were said to include Euronext, Deutsche BNLGÂ¶rse, Bloomberg and Icap’s main rival Collins Stewart Tullett, although sources suggest the reputed price tag of $700 million put several off. The talks with Icap are not exclusive and a deal is not thought to be imminent, sources close to EBS reveal, although the brokerage firm is the clear front-runner.
Although some market observers suggest Icap is a good option for the bank owners and that EBS is a good addition to Icap’s resources, there are doubts about the price allegedly being offered and the potential for a non-bank owned EBS in the future.
Sources point out that without the banks’ ownership to “protect” it, EBS will be in a straight fight with other platforms providing the same service – especially in an era where lines between buy and sell side are being blurred so quickly. “There are platforms out there that have replicated the EBS model with better technology,” claims one bank e-FX head. “More to the point they are cheaper to trade on for all parties. Just as client business has become less ‘sticky’ in the e-space, so too could bank loyalty to a platform.”
Some e-FX managers believe that Reuters will benefit from the sale of EBS as the banks deliberately try to balance the distribution of liquidity more evenly. There are also those that believe that a sale – along with the banks’ desire to push professional trading counterparties away from the B2C sphere – will also boost the attractiveness of CME and, possibly, Eurex, as alternate venues.
One area in which many market sources are in agreement is that the sale of EBS could have one major benefit – assuming extra resources are provided by the buyer. “If EBS – under any ownership – is to continue to be successful, it has to speed up its spending and upgrade its technology,” says an e-FX manager. “If the new owner is willing to undertake a serious upgrade of the technology, the platform could emerge in an even stronger position.”
EBS in a more competitive environment once the banks relinquish ownership will also have an impact on the wider industry. Although it has a majority share of turnover in the FX market, EBS has actually been operating at a loss in recent years. Filings with the UK’s Companies House show it lost $1.3 million in 2004 and $2.5 million in 2003.
To the banks, a lack of profitability is unlikely to have been an issue – its main function was to provide an alternative to Reuters as the core market liquidity pool. New owners, however, will be looking for revenue streams, and as such will look for the company to become a leaner, more efficient organisation. This could mean it has to raise prices; however that will be very difficult in such a competitive environment – especially as many believe EBS to be too expensive now.