With the acquisition of Hotspot by BATS Global Markets, 360T by Deutsche Boerse and, if the rumours are to be believed, FastMatch by the Intercontinental Exchange (ICE) there is a clear trend of accelerating M&A activity in the FX market, currently being driven by exchange groups.
Subsequently there are three obvious questions that spring to mind as a result of this trend.
1. Does 360T represent good value at €725 million?
This is somewhat difficult to say, given that 360T doesn’t publicly publish its volumes, although sources in the market estimate that it probably sees somewhere in the region of $70 yards a day.
In terms of revenue, Deutsche Boerse has been quick to point out that the platform’s revenue compound annual growth rate (CAGR) has been in the double digits since 360T was founded in 2000 and has an EBITDA margin in the 50% region.
In a slide presented on an analyst call on Tuesday the German exchange group showed that 360T’s revenues were €43 million in 2012, €51 million in 2013, €57 million in 2014 and is projected to be €65 million in 2015, giving it an average CAGR of 15% per year. Although not elaborated on during the conference call the slide showed that by 2020 Deutsche Boerse expects the revenue to be at over €200 million per annum.
If the 15% growth rate continues for the next five years then this would put 360T’s revenue at around the €130 million mark, however Deutsche Boerse has said that it expects the platform’s organic growth trajectory to accelerate following the deal. Additionally, it claims that it has spotted “double digit million euro revenue synergies” that can be realised as a result of it.
The synergies, according to Deutsche Boerse, will be realised through combining client bases with the FX spot ECN trading venue, leveraging the futures capabilities of its derivatives exchange, Eurex, being able to feed FX forwards and swaps from the ECN into Eurex’s clearing house and in the distribution of Deutsche Boerse’s products and data through 360T.
Now if 360T is achieving more than €200 million in revenue per year by the end of 2020 then €725 million purchase could certainly be viewed as a good deal for the exchange group, especially considering the strategic advantages for it in owning an OTC venue and successfully pushing into a new asset class.
But that is a big ‘if’, considering that to hit this target the growth acceleration and the synergies generated by the deal need to add up to a minimum of €70 million, and that’s ‘if’ 360T’s revenue continues growing organically at a very healthy 15% rate per year before these additions are made.
Leaving the basic mathematics aside, the initial reaction from the market has been mixed with regards to whether Deutsche Boerse got value for their money.
“It’s a good deal for Deutsche Boerse, they’re buying in at a time when volatility is higher and companies and asset managers are thinking more about their hedging. That should translate into higher volumes all round and 360T will be a part of that,” says one head of e-trading in Asia.
Jake Loveless, CEO of Lucera, also claims that the exchange has done good business. “This is a wildly de-centralised market but if you think about it there’s really only a handful of assets available for purchase and so I think that it’s a good price. This a platform with really good liquidity flow that a lot of liquidity providers would love to make markets into,” he says.
By contrast, a senior management executive at a rival platform claims that the price was too high, given what they see as 360Ts likely growth trajectory.
“360T will face a lot more competition in its core customer segments, this will increase pressure on its fee structure and could see it lose some pretty important customers. I think the management have sold it at the top, it’s a great deal for them. A lot of early investors are cashing in on the desperation from exchanges to get into the FX business,” they say.
Then there are those that feel that the price roughly in-line with the value of the platform.
“Price was about right given the unconfirmed volumes includes short date swaps which are less value transactions for everyone,” says one senior executive at a technology provider, before adding: “I still think that BATS got the better deal – there seems more room for growth in Hotspot than 360T”.
And finally, there are those that are sitting on the fence for the time being, such as one e-FX manager at a European bank who points out that regulatory landscape could determine whether this purchase is viewed as a success or not for Deutsche Boerse.
“Overall it seems that some of the platforms are happy to cash in on the investment and hard work that has been done over the years, and it also seems like some exchanges are keen to move into the FX market. Maybe they are smart and will be seen as first movers and they’ll look very smart if the regulations over the next twelve to twenty-four months force the FX market to trade more via exchanges.”
The manager describes the current M&A environment in FX as “extremely interesting” and notes that the platforms that are being bought by the exchanges will receive greater economic resources and support, which will in turn increase pressure on the spreads and the pricing models for trading on these platforms.
While it might not be immediately clear whether or not Deutsche Boerse got a good deal, what is obvious is that FX multibank trading platforms are going at a premium right now.
“We’ve had two transactions now, both at very strong multiples. The bar has been set high now, and even if the multiples in the next transaction or two aren’t as high as this, they will still be high,” is the opinion of one investment banker in the US, who says that they expect to see more deals announced in this space.
The banker adds that although the math in any acquisition is very important, when a potential deal is presented to the board and advisors at a public company they do tend to look at comparable deals for context in deciding whether to pull the trigger or not.
Looked at in this light, and taking the rumoured $70 billion per day volume at 360T as gospel, then the amount paid by Deutsche Boerse appears comparable to that paid by BATS Global markets for Hotspot, which sees about $30 billion per day on average. Where the former has paid roughly $11.36 million per billion dollars of ADV on 360Ts platform, the latter paid about $12.17 million per billion of ADV on Hotspots’.
Of course this is a simplification which tells us the cost but not necessarily the value of each platform to its respective buyer, also, Hotspot only trades spot FX whereas 360T’s volume is, as noted, largely driven by short date trades with less revenue attached to them. What it does show, however, is that an FX platform is an expensive thing to buy right now.
2. Why are exchanges buying OTC FX trading platforms right now?
One reason why an OTC FX platform appears to be the “must-have” item for exchanges in 2015 was highlighted by Deutsche Boerse CEO, Carsten Kengeter, on Tuesday’s analysts call for the exchange’s half year results.
“FX is clearly an area that has received a lot of regulatory scrutiny due to some of the deficits in how it was handled in the past and therefore there is a widely held view that certain areas of the FX market might be more open to exchange-like treatment and the transparency that we have provided in other asset classes and product ranges could be applied to this particular asset class as well,” he said.
Of course this debate about whether FX is going to increasingly move towards an “exchange-like” equities-style model of trading will be nothing new to regular attendees of Profit & Loss’ Forex Network events and readers of managing editor, Colin Lambert’s, column. What is perhaps new is that the exchange groups now appear confident enough that this shift in FX market structure will occur that they’re willing to invest big money as a result.
However, viewed from a different perspective, it could also be a sign that the exchanges are also getting more comfortable with working in an OTC market structure.
“The exchanges have traditionally been fairly married to the concept of a central limit order book and full transparency, but I think that through the evolution of the market and because of regulations like Dodd-Frank and Mifid moving the OTC market and listed markets somewhat closer together, the exchanges have gotten more comfortable that they can still derive value from being an agency platform where buyers and sellers meet, without dogmatically always having the pre and post-trade transparency of a central limit order book,” says Alex Yavorsky, global head of market structure and technology at Jefferies.
Prior to the last couple of years the exchange groups had been so occupied with consolidation between themselves and with vertical integration into areas like central clearing that they didn’t pay much attention to adjacent asset classes.
On the consolidation side, after a number of failed deals, such as the ones proposed between the London Stock Exchange Group (LSEG) and TMX, Deutsche Boerse and NYSE Euronext and the Australian Securities Exchange (ASX) and the Singapore Exchange (SGX) that were all blocked by regulators, appetite for M&A deals cooled in the exchange space.
And the vertical integration story has largely played out for the exchanges, as each major derivatives exchange now has in place most of the pieces that they need to build a vertical silo. Examples of recent deals in this area are LSEG’s acquisition of the clearing house, LCH Clearnet (although the group is very publicly against vertical silos), and ICE’s purchase of data and analytics firm, SuperDerivatives.
With no real M&A opportunities for the exchanges in these areas then it seems logical that these firms should look to deploy the significant cash revenues that they generate by pushing into new asset classes. The sheer size of the FX market, combined with the regulatory pressures already mentioned, make it seem logical that though this would be next asset class for the exchanges to push into.
“What I find interesting about the deals done for FX platforms so far is that they add up to roughly $1 billion in spend on somewhere in the region of $100 billion of notional per day. To me that’s interesting because the spot turnover is about $2 trillion per day and you have these firms paying $1 billion for about 5% of the total market volume. This really just shows how much growth there is left in this market,” says Loveless.
3. Will there be more deals for FX platforms?
Undoubtedly. And, given the premium that’s been established for buying these trading platforms right now, it’s hardly surprising that there are willing sellers looking to match off with eager buyers.
As previously mentioned, sources suggest that ICE is in advanced talks to buy FastMatch, although one industry source suggests that the rumoured $180 million price tag could be too high for a deal to be concluded when buying the team and increasing their current development budget might work out at significantly less.
One name that was not really being touted as a potential buyer until the last couple of weeks was CME Group. Despite not seeming to be in the frame for a number of rumoured deals, the Chicago-based exchange group was reportedly down to the last two in the bidding for 360T.
Discussing whether the CME Group’s move for 360T was opportunistic or whether they’re likely to be in the market for an OTC FX platform more generally, a source at one bank expressed something close to incredulity at the idea that the exchange group would not be in the market for what they described as “the right kind of platform”.
Pressed on what “the right kind of platform” would be for CME Group the banker says that the platform would have to be a high quality asset where there would be customers that are potentially interested in futures and there could be opportunities for clearing and the ability for the exchange to commercialise their market data. Given these attributes match up almost perfectly with the potential synergies identified by Duetsche Boerse as part of its deal for 360T then it would make sense if the reports of CME bidding for the platform were accurate.
Interestingly, the only FX platforms that fit this description that are currently still rumoured to be available both belong to State Street in Currenex and FX Connect. It’s not clear whether the custodian is actually willing to sell either, but if it did decide to then with 360T no longer an option and ICE supposedly occupied with FastMatch CME Group could be the obvious buyer. Of course rumours suggest that Nasdaq is another exchange interested in an OTC platform, but sources seems sceptical that they would be willing to spend the kind of money necessary to buy a platform like Currenex in the current inflated M&A market.
There are numerous other potential buyers in the market but there is generally a distinction between the exchanges, for whom these acquisitions are a strategic move, and the firms that are already present in the OTC FX market, for whom any deal would be a consolidation and cost synergy play.
There are exceptions to this, such as the other interdealer brokers aside from Icap, which have a presence in the electronic FX market but would be keen to grow it if possible. The problem for these firms as buyers is that they can’t pay to the same trading multiple as an exchange can and they don’t have the same opportunities for synergies.
The bigger players already in the FX market, like Icap or Thomson Reuters, will always be potential buyers of FX trading platforms because of the possible synergies available and because acquiring a new platform could extend their capabilities into new products or give them exposure to a new customer segment.
But as one source explains, there’s limited value in firms with a large existing spot FX franchise purchasing a smaller spot platform unless it’s for their technology. They point out that while there might be synergies, there is also the concern that adding a platform with $10 billion ADV to one with $100 billion ADV might in fact leave them seeing $105 billion ADV due to firms not trading as much because of the overlap.
Other potential buyers in the market are private equity firms, who will no doubt be more interested in purchasing stakes in FX OTC trading platform now that they see the figures that they are selling for. Private equity firm Summit Partners only acquired its majority stake in 360T in 2012 and, while the amount it paid to do so was not disclosed, it seems likely that it made a handsome profit from the Deutsche Boerse deal.
As a hypothetical example of where a private equity sponsorship could make sense, one source points to LMAX Exchange in the UK. The fact that it is now turning a profit gives comfort that the investor is unlikely to lose money in the short-term, as a smaller FX platform the private equity firm wouldn’t have to write a huge cheque to buy a stake in it and in the longer-term if they can help grow the business then the firms chances of a profitable exit are boosted by the fact that blue chip global exchange are now buyers of these types of assets.
Another potential outcome is smaller platforms binding together to consolidate volumes and create cost synergies.
“I think that the next phase of acquisitions will focus on roll-up strategies where you’ll start to see combinations of smaller venues coming together to achieve synergies across desks that are doing five to ten billion dollars per day on their platform,” says Loveless.
Despite the expense involved in acquiring an FX trading platform in the current M&A environment, there appears to be no shortage of buyers in the market. While exchanges remain at the forefront of this M&A activity, there are numerous other potential company combinations that could play out before the end of the year.
Ultimately, like with BATS Global Markets’ acquisition of Hotspot, while the price paid was high the value of this latest deal will reside in 360T’s longer-term strategic value for Deutsche Boerse. And if the exchange group can pull of its ambitious new growth program addition to its plans for 360T then this purchase could be looked back on as a significant coup in the future.
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