Nasdaq Inc.’s biggest-ever acquisition is supposed to make the exchange operator more predictable and profitable. Investors may need more convincing.
(Bloomberg) — Nasdaq Inc.’s biggest-ever acquisition is supposed to make the exchange operator more predictable and profitable. Investors may need more convincing.
Monday’s proposed $10.5 billion purchase of financial-software maker Adenza sent shares of Nasdaq tumbling to their biggest intraday drop in nearly a decade — even as the exchange’s Nasdaq 100 index continued on a rally that has boosted the benchmark by 35% this year. The cash-and-shares deal also gives a stake in the public stock exchange to the private equity firm that owns Adenza, Thoma Bravo, along with a seat on the board.
By some accounts, Nasdaq is paying a rich price, and it’s taking on so much debt that S&P Global Ratings immediately cut Nasdaq’s credit grade. But Chief Executive Officer Adena Friedman said she’s working to build Nasdaq’s software business, which now accounts for more than a third of its annualized recurring revenues. Software sales to financial firms are steadier, insulating the business from trading volatility.
“We’re trying to make sure we’re buying the best-in-breed companies to solve and serve clients so that we can really be the best partner we can be to banks and brokers around the world,” Friedman said in an interview.
At the end of Monday’s trading, Nasdaq was down almost 12% to $51, off 17% for this year. Some analysts voiced concern over the sale price, with a valuation roughly 18 times Adenza’s sales, which “isn’t particularly attractive,” Bloomberg Intelligence analyst Paul Gulberg wrote. At Keefe, Bruyette & Woods, analyst Kyle Voigt predicted the deal will start adding to earnings in its third year, and “investors will eventually warm to the deal, although this could take time.”
More immediately, S&P downgraded Nasdaq’s credit rating to BBB from BBB+, citing increased debt that would “weaken the company’s financial risk profile.” On the bright side, S&P cited opportunities for cross-selling, “because it seems that only a handful of Nasdaq’s current clients overlap with those of Adenza.”
Tech Leads
While Nasdaq is the second-largest stock exchange in the US, it bills itself as a technology company. Beyond running the exchange, the New York-based firm offers data, analytics, software and other surveillance services to clients including publicly traded and closely held companies and investors.
Adenza sells software to banks, asset managers, exchanges and other parts of the financial services industry that helps manage regulatory reporting, compliance and risk management. The business was formed in 2021 when Thoma Bravo merged Calypso Technology and AxiomSL.
The deal would place Thoma Bravo among Nasdaq’s largest shareholders. The private equity firm is known for its investments in software companies and manages more than $120 billion in assets. Friedman said Nasdaq approached Thoma Bravo on the deal, which will also see managing partner who led the investment, Holden Spaht, appointed to the board.
It’s not the first or biggest deal Thoma Bravo has done with a public exchange business. Intercontinental Exchange, owner of the New York Stock Exchange, bought a mortgage technology company, Ellie Mae, from Thoma Bravo in 2020 for $11 billion.
Nasdaq, for its part, has been trying to become less dependent on transaction-based revenue and data tied to trading, which fluctuates, Friedman said. With the acquisition of Adenza, Nasdaq expects to increase its solutions businesses to 77% of total revenue from 71% today, with an even larger addressable market, she said.
The firm has been focused on diversifying its revenue sources beyond the exchange business. In recent years Nasdaq has made investments in software, data and other offerings. It also expanded technology tied to protection and anti-crime software through its acquisition of Verafin, with products that help investigate and report instances of money laundering, fraud and manipulation for banks and trading firms.
Read More: Nasdaq’s Earnings Beat Showcases Prescience of Software Push
Adenza has more than 60,000 users across global and regional banks, broker-dealers, insurers, asset managers, pension funds, hedge funds, central banks, stock exchanges and clearing houses, securities-services providers and corporates. It estimates $590 million of revenue for this year.
Nasdaq plans to issue $5.9 billion of debt for the acquisition, which will bring its leverage to 4.7 times by the completion of the deal, which is expected in six to nine months. It plans to reduce that leverage to 4 times within 18 months.
Bloomberg LP, the parent company of Bloomberg News, competes with Adenza in providing trading and risk solutions.
–With assistance from Ben Scent.
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