Nasdaq/Adenza: $10.5bn compliance deal lacks investor complicity

Perhaps there are some businesses even a fancy takeover cannot rescue from boringness. Compliance, for example. Shares in Nasdaq dropped 13 per cent in morning trading in New York after the tech-focused exchange operator announced its $10.5bn purchase of compliance software firm Adenza.

The implementation of Dodd-Frank in 2010 has doubled the number of regulations applied to US banks, according to a study by Rice University’s Baker Institute for Public Policy. Keeping up with red tape is costly and time-consuming. Spending on compliance by the financial services sector has risen more than $50bn since 2009.

Regulatory burdens will grow in the wake of this year’s banking turmoil. Nasdaq wants to cash in on higher demand.

It is best known as an exchange operator. But the company has been steadily reducing its dependence on revenues from trading services. These rose just 1 per cent in the most recent quarter. A solutions business, which provides back office and trade surveillance services and within which Adenza will sit, is far bigger, accounting for about 70 per cent of group revenues.

Nasdaq is paying a lot to get into compliance. Its cash and stock offer values Adenza at 20 times trailing revenue, or 31 times expected 2023 ebitda before cost savings. Nasdaq itself trades on a multiple of just 4.5 times, lagging some rival exchange operators.

Nasdaq is paying for Adenza with $5.75bn in cash and 85.6mn in new shares to Thoma Bravo, giving the private equity group a near 15 per cent stake. The $5.9bn of debt Nasdaq will take on will increase its leverage ratio to 4.7 times. 

The exchanges operator does not expect the deal to be earnings accretive until two years after the close. Some $80mn in cost cuts, taxed and capitalised, would be worth only $465mn.

The takeover might be partly justified by Adenza’s fast growth and high margins. But there is too much competition in this sector. Dull and crowded sounds like a party no one should pay top dollar to attend.