Nasdaq’s [NASDAQ:NDAQ] USD 10.7bn deal to buy Adenza, announced in June, continued a trend of big-ticket M&A transactions by the largest equities exchanges in the US.
It is Nasdaq’s largest ever buy and the fourth largest among the domestic exchanges, according to Dealogic data.
The tech-focused exchange joins Intercontinental Exchange [NYSE:ICE], owner of the NYSE, and global derivatives trading platform CME Group [NASDAQ:CME] as the biggest acquirors among North America’s exchanges. Since 2018, all three have made multi-billion-dollar deals.
The recent surge in deal volume continues a trend since 2008 of exchanges diversifying their business models away from transactions after the Great Recession tanked trading volumes and top lines.
They have used M&A to bring on a variety of adjacent fintech services that add more and steadier earnings streams.
Recurring streams
Adena Friedman, Nasdaq’s CEO since 2017, has been explicit about her goal to turn her company into more of a fintech firm. Adenza’s software provides capital market, investment management, risk management and other services that will add to Nasdaq’s recurring annual revenue stream.
Nasdaq estimates that Adenza will boost its non-transactional solutions revenues to 77% of FY2023 total revenue from 71% the prior year. The firm expects Adenza to increase annual recurring revenue to 60% of 2023 total revenues from 56%.
Each exchange approaches acquisitions slightly differently to suit specific business models, however. ICE, whose blockbuster NYSE acquisition happened a decade ago, agreed a USD 15.5bn deal for Black Knight in 2022, bringing in software with data and analytics for loans, real estate and capital markets. Two years prior, ICE bought cloud-based mortgage finance platform Ellie Mae, now ICE Mortgage Technology, in a USD 11.1bn deal.
Opportunities have largely diminished for exchange-on-exchange M&A, said Andrew Bond, an exchange market structure analyst with Rosenblatt Securities.
Some exchange targets remain, but there are regulatory concerns around competition and nationalism, since governments are reluctant to allow foreign ownership of domestic exchanges, he said.
Exchanges are likelier to acquire more recurring revenue streams, Bond said. That generally comes from software, market data and services like surveillance and anti-financial crime. Artificial intelligence offers promise in trading and clearing automation, Bond said.
Trading targets
One inviting target for the exchanges could be the capital markets business of Fidelity National Information Services. Fidelity was in talks to sell the unit in a carve-out deal with Symphony Technology Group in late 2021 before STG abandoned negotiations in January 2022.
Another possible target is the capital markets business of Finastra, based in the UK. The unit provides software for trading, monitoring and compliance. Owner Vista Private Equity in 2022 negotiated a sale of the business to Veritas Capital before talks broke down over the sale price.
A third possibility is the London Metal Exchange, which is owned by the Hong Kong Exchanges & Clearing [HKEX:388] and was rumored to have attracted M&A interest from ICE and CME.
Tomorrow’s big buyer?
Although CME in November 2018 completed a USD 5.9bn transaction for UK-based brokerage NEX Group, the company has been slower to diversify away from trading, Bond said.
“It has the highest margin profile and what has historically been a highly defensible futures business,” he said.
CME was in August 2021 rumored to have approached CBOE Global Markets [BATS:CBOE] for a reported USD 16bn takeover, but no deal came to fruition. CBOE is an exchange network for global derivatives, currency exchange and securities.
During CME’s most recent quarterly earnings presentation, executives said they are open to acquisitions but will remain disciplined and targeted.
The exchange is in a strong capital position to do a deal, CEO Terrence Duffy told investors. With its competitors so highly levered from recent transactions, CME could be a preferred buyer for assets that are shopped around, he said.
Analytics by Izaz Ansari
