Yesterday, NASDAQ OMX Group Inc. (NDAQ) announced its intention to purchase the corporate management arm of Thomson Reuters. The deal is valued at $390 million and is expected to culminate by the first half of 2013, subject to regulatory approvals.
Accordingly, NASDAQ has agreed to obtain the Public Relations, Investor Relations and Multimedia Solutions businesses of Thomson Reuters. The company plans to fund the transaction mostly by cash and the remaining from its revolving credit facility.
Additionally, NASDAQ sought the advice of BofA Merrill Lynch of Bank of America Corp. (BAC) and Barclays Capital Plc (BCS), while Thomson Reuters was advised by JPMorgan Chase & Co. (JPM).
The deal complements the growth strategies of both the parties. Through this, NASDAQ further aims to accelerate its non-transaction revenue base, which already represents over 70% of the company's total revenue. Alongside, the company seeks to generate growth through international expansion as well as through escalation in technology and data revenue.
Over the past few quarters, revenue from equity and derivative trading have been marred by volumes declines amid the market volatility as well as unfavorable currency and interest rate fluctuations. Hence, the decision to boost its corporate management solutions with an additional client base of over 7,000 in more than 60 countries across the globe will likely help NASDAQ witness positive results in the future.
Excluding the costs related to the deal, the transaction is projected to be accretive within the first year of purchase and generate accentuated cost synergies of $35 million annually, thereby reflecting incremental returns on capital as well. Moreover, the acquisition is estimated to shore up NASDAQ’s revenue from corporate solutions services to about $330 million from the current $97 million. This indicates over 3x of revenue boost, accounting for more than 7% of total revenue for the company at present.
On the other hand, Thomson Reuters has been restructuring its business to focus on and expand its core business, in an attempt to nullify the adversities led by the ongoing economic volatility and financial crisis, which resulted in many of its banking clients opting for layoffs to reduce costs. Moreover, its corporate solutions division accounts for only 2% of total revenue, all of which justifies the company’s decision of divestiture.
Overall, we believe that NASDAQ’s inorganic expansion initiatives are endeavors to counter the competitive forces and inject dynamism to its business profile. The company’s strategic efforts to enhance fraying market position are also crucial given the challenges posed by the recent reforms in the US. This leaves no reason for NASDAQ to lag the market moves.
Earlier this week, the company also announced the acquisition of 25% stake in Amsterdam-based The Order Machine (TOM) – Dutch cash equity and equity derivatives trading platform. Additionally, NASDAQ is scheduled tobuild a new interest rate derivative trading platform – NASDAQ NLX – in London.
Nevertheless, we cast a neutral outlook on the company’s attempts to expand and integrate the recent acquisitions given the global economic volatility, and currently remain on the periphery to assimilate the future developments.
NASDAQ carries a Zacks Rank #3 that implies a short-term Hold rating, while the long-term recommendation stands at Neutral.
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