Yesterday, Reuters reported that NASDAQ OMX Group Inc. (NDAQ) plans to adopt a new capital plan in the beginning of the fourth quarter of 2011. Accordingly, the company intends to buyback more shares in the coming period, given the sharp price declines in the stock market.
The company enjoys modest capital leverage that provides scope for stock repurchases and acquisitions. The new capital plan is further expected to help the company achieve its long-term leverage ratio target of 2.5x. Additionally, with free cash generation of $50–$75 million every quarter, NASDAQ has ample funds to buyback shares from time to time.
Over the last several years, NASDAQ has expanded its business portfolio through mergers and acquisitions (M&A). The outstanding technical performance along with the recent acquisitions have enabled the company to enter new markets on a low cost and highly flexible platform, offering value addition to its clients and creating additional sales opportunities.
Of late, however, the company has been facing stiff competition with the recent wave of M&A activities in the stock exchange industry that tends to reduce the market share and the leverage of its business. This includes both product and price competition and has continued to increase as a result of the creation of new execution and listing venues in the U.S. and Europe.
While exchange operators across the globe are expanding their operating efficiencies through significant M&A, NASDAQ is desperately seeking a business combination in order to diversify beyond product and geography. The failure of NYSE Euronext Inc. (NYX) takeover bid, earlier this year, further threatens to diminish NASDAQ’s size and global footprint.
On the flip side, NASDAQ aims to acquire LCH.Clearnet in its portfolio basket and confirmed that it is not looking forward to any M&A activity in Asia, particularly the recently discussed Singapore Exchange Ltd. LCH.Clearnet is a leading clearinghouse for swaps in Europe owned by multiple banks and market participants. As one of the bidders, NASDAQ had reportedly offered about €350 million a couple of months back and awaits a final course of action.
Overall, NASDAQ has been witnessing quite sharp market price declines on account of the ongoing economic volatility and increased competition. Going ahead, this can severely hamper growth in trading activities, pricing adjustments, listings and the markets for the company’s products, thereby adversely affecting the operating results and its market share. Therefore, we believe that a strong capital plan at this stage would be crucial for the NASDAQ’s operational and market stability.
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NYSE EURONEXT (NYX): Free Stock Analysis Report
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