Nasdaq Closes Thomson Reuters Deal

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Nasdaq OMX Group Inc. (NDAQ) culminated acquisition of the corporate management arm of Thomson Reuters well within the scheduled expectation of closure by the first half of this year.

Announced in Dec 2012, the deal was inked for $390 million, whereby the company had agreed to obtain the Public Relations, Investor Relations and Multimedia Solutions businesses of Thomson Reuters. These three businesses will now be amalgamated with Nasdaq’s Global Technology Solutions operations.

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 reflects a more than three-fold increase in revenue, accounting for more than 7% of total revenue for the company currently.

Through this deal, Nasdaq aims to accelerate its non-transaction revenue base, which already represents over 70% of the company's total revenue. While revenue from equity and derivative trading have been marred by volumes declines, the latest acquisition will likely boost the corporate management solutions with an additional client base of over 10,000 in more than 60 countries across the globe, thereby diversifying and delivering positive results for the company in the future.

We believe that Nasdaq’s strategic efforts to enhance its fraying market position are also crucial given the challenges posed by the recent reforms in the US. As a result, the company struck a deal with BGC Partners Inc. in Apr 2013, to buy its electronic trading platform for the US Treasury – eSpeed for $1.23 billion. In the same month, Nasdaq also completed the acquisition of 25% stake in The Order Machine (:TOM) – the Dutch cash equity and equity derivatives trading platform.  

Lower Debt Eases S&P’s Concern

Previously, Nasdaq had planned to fund the combined purchase bill of the eSpeed and Thomson Reuters acquisitions primarily through a $1.0 billion bond sale. However, given the caution raised by the ratings agencies, the company will now use $350 million of its cash and raise only about $750 million from bonds. Alongside, Nasdaq also plans to use a bank credit line worth $79 million.

Although the process would still escalate the company’s total debt by 40%, it will still be much lower than previously expected. Moreover, Nasdaq aims to reduce this debt over the next 12 months, in order to pacify S&P’s concern over the company’s rising debt. While any deterioration from the current scenario is likely to impel the rating agency to demote Nasdaq’s credibility from the current “BBB” rating, S&P seeks to wait and watch for any improvement.

While Nasdaq carries a Zacks Rank #4 (Sell), other stocks in the financial sector that are outperforming include CBOE Holdings Inc. (CBOE), Ellington Financial LLC (EFC) and Nationstar Mortgage Holdings Inc. (NSM). All of these stocks carry a Zacks Rank #1 (Strong Buy).

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