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FTX would need to offer a ‘material premium’ to acquire Robinhood: Analyst

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JMP Securities Director of Financial Technology Research and Senior Research Analyst Devin Ryan joins Yahoo Finance Live to discuss rumors of an FTX-Robinhood deal.

Video Transcript

BRIAN SOZZI: Robinhood shares are in focus on speculation that crypto platform FTX is in talks to buy the company. But FTX founder Sam Bankman-Fried told Yahoo Finance there are no active discussions to acquire the trading platform. Let's talk more about this with Devin Ryan, director of Financial Technology Research at JMP Securities, a Citizens company. Great to see you, Devin. So the combination of these businesses, let's say via a merger, would that be a match made in heaven?

DEVIN RYAN: You can definitely see the strategic rationale. I'm not sure it would be a match made in heaven. You know, there's always complications, bringing two businesses that are different together. And Robinhood really checks the box of, as we all know, kind of the retail investor. And FTX is looking to get into that space. And so there's not that many ways you can do it in a scale way, with, most likely, the type of investors, the millennial investors that are also quite active in crypto to do it other than a firm like Robinhood.

So we can see the strategic rationale. There are complications here, which we can go into. But, you know, it's an interesting thought. And we're not shocked that people would be, at least, looking at Robinhood particularly after the stock price decline over the last year.

BRAD SMITH: And some of the other consolidation that we have seen among major trading platforms, at least in the past five years, it comes to mind here on this instance, but this would be between a potential crypto company and a major kind of retail investor trading platform that ultimately has been able to add on crypto as a module as well. And so with all of that in mind, is there any other company that would even kick the tires or have internal discussions right now about whether or not to go out there and acquire Robinhood at, even with a premium, maybe $10 billion?

DEVIN RYAN: Yeah, so a couple of questions in there. First off, the consolidation that happens in the brokerage space is primarily driven by expense synergies. So when firms like Schwab and Ameritrade get together or you can go way back to other examples, there's often huge expense synergies that come out of those deals. And the revenues are pretty complementary, where you don't lose much revenue.

Robinhood, obviously, is a business model that's still not profitable. They're moving towards that. They expect to get to, at least, cash flow positive by year end. But that makes it harder in our opinion for some of the kind of traditional players to look at acquiring them. We're not saying that could never happen. But one point that is kind of a key aspect here, for FTX or for anyone, is that Robinhood's founders have voting rights that give them 10 to 1 on their Class B shares. So they only own 15% of the stock, but they have over 60% of the voting power.

And so what that essentially means is that the company is not actively seeking an acquirer, in our opinion. And they would have to be on board with any price paid. And so our view is that you need a really material premium to get those founders on board with the sale. And so the conversation on FTX, if it progresses towards actual discussions with the company, we think that would be very positive because we think they would understand that hurdle to getting a deal done, which would then imply there could be a big premium. But right now, there's no news around that. And so we still think we're probably at a relatively low probability of something happening here.

JULIE HYMAN: Devin, it's Julie here. Is Robinhood in trouble, so to speak, from a financial perspective? I mean, they do have a decent amount of cash on the balance sheet, but the stock-- I'm just looking here, reminding myself it came public at $38 and it's trading at $9. Like, at what threshold do you get more worried, if you're not already, about Robinhood's prospects?

DEVIN RYAN: Yeah, so financially, they're not in trouble. They have $6 billion of cash. And they're not really burning much cash. So if they were burning, you know, hundreds and hundreds of millions of dollars every quarter or more, that would be concerning. But it would also have to happen over the next couple of years. And we have to take a step back here. We're not in a normal environment for trading.

Just as we weren't a year ago or a year and a half ago in the first half of 2021, we're kind of facing down potential recession. There's a huge bid ask spread around where the economy is going and where the markets are going. And not shockingly, people are a little more timid about transacting. This isn't normal. I think we get through this. The market always does. And so you would need the environment to stay really difficult and actually get worse from here.

The second point is payment for order flow gets a lot of attention because it is 70% or so of Robinhood's revenues. There's a lot of other alternatives for them to make money beyond payment for order flow based on their customer orders, whether they internalize those or there's some different models that they could look at in the future. So we're not concerned about any risk. I think the stock is down. Sentiment has shifted dramatically. And, you know, right now, we're in a really tough environment. And that could continue for maybe a quarter or two. But history would say it's not going to recur for a year or two. We eventually pull out of these downturns.

BRIAN SOZZI: Devin, just going back to that structure in terms of Robinhood, of course, Vlad Tenev a big shareholder there in the company. What would get a deal done? Are we talking $50 plus a share to get Vlad on board with combining FTX?

DEVIN RYAN: I don't know. Like I said, I don't think they're actually proactively even thinking about doing a deal. They, as far as we know, are not approaching other firms or not telegraphed that that's in their interest. The stock went public at $36 last year. Obviously, we're in the upper single digits today. So we do think there's a long ways to go before they would have any interest.

And it just gets back to this point that if they're not desperate-- and we don't think they're desperate with $6 billion of cash and liquidity. And some of that is not necessarily excess, but they do have a very strong cash position. Then they're not a forced seller here. And so just anywhere close to where the stock is currently trading, it doesn't make sense to us and we don't think makes sense to the founders as well.

JULIE HYMAN: Hey, Devin. Before you go, I got to ask you about the stress test also because you cover the brokerages. Morgan Stanley, Goldman Sachs both returning cash to shareholders. What does that tell us about their positioning going into a potential recession here, especially when there's also a Bloomberg story out this morning, talking about big losses in Goldman's consumer unit?

DEVIN RYAN: Right, well, I think we all know that the banking system is in an incredibly strong position right now. And you saw that last week when the stress test results came out and last night when the capital return press releases came out. I would say, relative to expectations, both Morgan Stanley and Goldman were modest positives. Morgan Stanley-- and you're seeing it in the stock today-- probably more so. They announced a $20 billion share repurchase authorization. That's 15% of the market cap.

So I think that, Julie, answers your question. They feel very good about their future prospects and their capital position, even in a more challenging macro environment. They're not necessarily saying they're going to buy that all back in the very near term here. But I do think that's a vote of confidence. And then Goldman increased their dividend by 25%.

So we knew that they would come through the stress test in a good position. I would say the news that we got last night around the cap return is modestly positive, Morgan Stanley maybe a bit more than Goldman. But it just, I think, shows you how far this industry has come over the last decade, and, really, since the stress test began, when there was a lot of uncertainty going into this process. Coming on the other side here, I think people felt much more comfortable.