M&A Report
Executive Summary
- Despite Covid-19, scope deals continued as exchanges and other financial infrastructure players expanded beyond trading products into information, analytics, and technology services. Scale and cross-border M&A also regained importance as exchanges invested in building global scale.
- The rapid evolution of the financial market infrastructure value chain resulted in infrastructure players turning to M&A to gain more value-added services and to strategically build integrated platforms. This increases their value and offerings to clients while boosting the share of nontrading revenue and decreasing earnings volatility. It is helping them create more efficient markets and deliver better information as well as more risk controls and stability.
- A crowded field of exchanges, clearinghouses, private equity, and other acquirers is forcing all players to adapt their deal strategies, broaden their networks to get access to the best deals before they come to market, and perform diligence more quickly.
M&A helps financial market infrastructure operators improve markets
Despite the many economic uncertainties introduced by the Covid-19 pandemic, M&A has maintained its steady pace since March across the global financial markets infrastructure (FMI) industry, with much of the focus on data and analytics company acquisitions (see Figure 1).
Figure 1
The FMI ecosystem generally includes trading venues, clearing entities, custodians, central securities depositories, registries, data providers, software providers, and utilities. As alternative assets become available, as technology creates a path for digital assets–focused venues and redefines trade and post-trade activities, and as utility providers increase the scope of their service and share of wallet to compete with traditional FMIs, this ecosystem has been taking new shape and opening up M&A opportunities.
Traditionally, success in exchanges required a focus on scalability and liquidity. These changes in market structure and dynamics made it equally important to evolve along with the FMI ecosystem and benefit from its flexibility. Infrastructure players acknowledge the need to address client pain points by delivering new services in a strategically integrated platform that creates efficiency for the market and participants as well as less risk and better controls. These companies buy and build out fast-growing segments of the business such as information services, technology services, and post-trade services. Consider how the London Stock Exchange’s recent $27 billion deal for data and analytics company Refinitv will significantly broaden its capabilities in market data. Such deals help exchanges boost their share of nontrading revenue and decrease their earnings volatility.
Overall, the FMI operators generate about 30 to 40 deals each year. Private equity (PE) firms, venture capital, and other financial investors generate even more deals. Some of the strategic FMI operator deals in 2020 were aimed at building scale—sometimes global scale. That was the case with the Cboe purchase of EuroCCP, for example.
Expanding the range of scope deals and players in FMI
M&A has become a highly effective lever for exchanges to advance their long-term strategic agendas across the global FMI industry. The M&A activity illustrates distinct investment themes among different sets of players.
Data providers and analytics players: FMI companies must meet the demand for passive equities, risk management, and trade efficiency, and that’s only possible through actionable data. Expanding capabilities in this area was the impetus for Deutsche Börse’s acquisition of risk management software provider Axioma.
Financial market infrastructure companies must meet the demand for passive equities, risk management, and trade efficiency, and that’s only possible through actionable data.
Trading venues and brokers: With new asset classes, tokenization, new business models, and an accelerating build-up of digital asset propositions globally, FMIs must build and support new trading venues and distribution channels. On the distribution side, that is why FNZ Group, for instance, acquired leading German investment platform company ebase; it’s also why Deutsche Börse’s Clearstream acquired Zürcher Kantonalbank’s Swisscanto Funds Centre and a majority stake in UBS’s fund distribution company Fondcenter.
Trading platform providers: Changes in market structure and the growth of alternative capital requires FMIs to build platforms that efficiently connect investors with their assets. State Street’s acquisition of Charles River Development will join Charles River’s software-as-a-service capabilities with State Street’s extensive front-, middle-, and back-office capabilities. The combination will create an end-to-end and interoperable buy-side platform, thereby also acknowledging the growing strategic importance of buy-side clients for FMIs regarding the optimization and expansion of their business models.
Given the growing number of attractive opportunities globally, PE investors have systematically started increasing their activity across the entire FMI value chain. For example, Deutsche Börse built a new company by acquiring Axioma, a global provider of cloud-based portfolio and risk management software solutions, and combining it with its existing index businesses (STOXX and DAX) in 2019, with General Atlantic entering into a strategic partnership as a minority investor in the new company. Through this innovative PE-backed transaction, Deutsche Börse and General Atlantic were able to create a fully integrated, leading buy-side intelligence player that will provide products and analytics to meet the growing demand for end-to-end platforms in the global FMI sector.
Using M&A to Build Integrated Platforms in Financial Markets Infrastructure
As the landscape rapidly evolves, with exchanges expanding beyond trading products into information, analytics, and tech services, players will use M&A to keep pace.
The road ahead: Five ways to succeed in FMI deals
As global FMI companies proactively use M&A to leapfrog the competition and fundamentally realign their existing businesses, there are five fundamentals to keep in mind in this growing market.
Screening: With the ecosystem rapidly expanding, FMI acquirers need to improve their screening capabilities to identify the most suitable and attractive targets—for example, which data firms to buy or which software partners to choose for alliances. The key will be to broaden the network constantly to be able to identify and then move on the best targets before they are even on the radar. Many acquirers have set up corporate venture capital units to invest early in promising companies.
Diligence and execution: With expanding competition from all corners of the FMI industry as well as from financial investors, it has never been more important to perform diligence quickly. But given the restrictions necessitated by the Covid-19 pandemic, it also has never been more difficult to do so. In light of these challenging circumstances and because of the growing strategic importance of M&A in the global FMI sector, it even has become usual for companies to close deals valued at greater than $1 billion without physically meeting the target company’s senior management throughout the due diligence process. Adding to the degree of difficulty are the traditional challenges of buying in an unfamiliar corner of the industry—for instance, an acquirer of a digital asset platform might need to deal with a lack of financials—and new considerations such as environmental, social, and governance criteria, which are becoming increasingly relevant in deals. As the competition heats up, so does the need to hasten execution.
Exchanges are complex businesses. Acquirers need to ensure that as they add new businesses, they also add seamless interfaces.
Integration: Creating value with diversified businesses requires intense attention to integration—using the old scale playbooks will only hurt the chances for success. Exchanges are complex businesses. Acquirers need to ensure that as they add new businesses, they also add seamless interfaces. They need to ensure that top talent stays on board. Acquiring a similar business does not mean that full integration will be simple. For example, companies must adjust product strategy to have a standard way to sell products across geographies. They also need to define an integration approach that gives them uniqueness in the market and find ways to deliver that integration using existing or newly built technology while minimizing the inherent complexity.
Partnering: The best acquirers are the most adept at finding the right partners and crafting partnerships to make critical deals happen. As we mentioned, Deutsche Börse teamed with General Atlantic for its Axioma acquisition. General Atlantic invested around $715 million to finance the acquisition along with Deutsche Börse, which provided its industry expertise through an integration of the firm’s index businesses. As many companies are learning, it is not necessary to be a 100% owner to expand into fast-growing new markets or adjacencies, or to add a capability that makes you stronger.
Communication: Communication is key to ensuring that investors understand how an acquisition fits into and advances an overall strategy; it also helps to keep employees motivated during transitions and to ensure that new talent stays on board. Communication is critical for helping ecosystem partners understand your differentiation, your creativity, your ability to create value, as well as to stress the role that a newly acquired asset plays in delivering that value. This was the same challenge faced by software companies as they shifted to a software-as-a-service business model.
Market infrastructure companies need to embed efficiency, stability, and risk controls into the market ecosystem. The next wave of improvements needs to increase cost and capital efficiency and address client pain points through better data and analytics, software, and post-trade processes as well as innovation in new products and services. The challenge and opportunity for market infrastructure players is to integrate these capabilities and businesses quickly. Companies can build things, but a lot of the near-term opportunity is about creating value by acquiring and integrating these capabilities into a more efficient market platform.