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Nasdaq to Buy eSpeed for $1.23B

Zacks Equity Research

Nasdaq OMX Group Inc. (NDAQ) announced its intention to purchase BGC Partners Inc.’s (BGCP) electronic trading platform for the US Treasury – eSpeed. The deal is valued at $1.23 billion and is scheduled to culminate by mid-2013.

Accordingly, Nasdaq agreed to pay BGC $750 million in cash, while about $484 million will be paid through stock ownership. The shares will be paid out by Nasdaq over a 15-year period with annual issuance of about 1 million shares, depending on the performance of the operation.

With annual revenue generation of about $100 million, eSpeed trades in US Treasury notes and bonds with a maturity profile anywhere between 2 and 30 years. These highly liquid bonds are primarily traded by the bank giants and have a daily turnover of over $500 billion. Post the closure of the deal, it is expected to be accretive to Nasdaq’s earnings within the first year, also adding to its fixed- income product portfolio.

The latest purchase consideration is another step to fortify its market position by diversifying into investment services. In Dec 2012, Nasdaq had agreed to acquire the corporate management arm of Thomson Reuters for $390 million. Subject to regulatory approvals, this deal is expected to close by June this year.

The acquisition of BGC further reflects Nasdaq’s growth strategy of accelerating its non-transaction revenue base, which already represents over 70% of the company's total revenue. Alongside, the company seeks to generate growth through inorganic expansion as well as counter the competitive forces and inject dynamism to its business profile.

Over the past few quarters, revenue from equity and derivative trading have been marred by declining volumes amid the market volatility as well as unfavorable currency and interest rate fluctuations. Hence, the decision to boost its technology and data revenue across the globe should likely help Nasdaq witness positive results in the future.

Moody’s Wary of Nasdaq’s Acquisitions

However, Moody’s Investors Service of Moody’s Corp. (MCO) is concerned over Nasdaq’s debt of over $1.0 billion from the acquisitions of BCG and a unit of Thomson Reuters. While the ratings agency is scrutinizing Nasdaq’s capital adequacy and financial strength, a downgrade is likely possible from the current “Baa3” ratings on the company’s bonds, given the consistently deteriorating trend in Nasdaq’s financial leverage. Yet, management expects to improve the company’s leverage eventually.

Another reason for concern stems from the fact that the US Treasury bonds are trading at their recurring lows as the Federal Reserve is buying back a chunk of these bonds under the latest quantitative easing (:QE) program. This has also resulted in low rates, which are expected to continue at least for another year, and hence, resulting in low trading activity of such bonds. Therefore, we currently remain on the sidelines to view the future of these acquisitions.

While Nasdaq and BGC carry a Zacks Rank #3 (Hold), Moody’s and Euronet Worlwide Inc. (EEFT) hold a Zacks Rank #1 (Strong Buy).

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