Nasdaq, Inc. (NDAQ) has announced the acquisition of Adenza, a prominent financial risk software company, from Thoma Bravo, a private equity group, for a cash-and-stock deal valued at $10.5 billion. This acquisition marks the largest deal in Nasdaq’s history and indicates its strategic shift towards becoming a SaaS technology provider.
The Acquisition: Nasdaq’s Strategic Pivot
Oppenheimer analyst Owen Lau has reiterated an Outperform rating on the shares of Nasdaq, anticipating that this latest acquisition will substantially increase Nasdaq’s recurring revenue, margin, and organic growth. It is expected to broaden the company’s offerings, fostering long-term multiple expansions. Lau notes that with Adenza, Nasdaq strengthens its capacity to serve financial services clients and modernize risk and regulatory technology (regtech) platforms. Nasdaq’s management is also hopeful of achieving $50 million of run-rate revenue synergies in the medium term and $100 million in the long term through cross-selling opportunities and deeper client penetration.
Deal Financing and Share Reaction
This strategic acquisition will be funded through a mix of cash and stock. Nasdaq will pay $5.75 billion in cash and issue 85.61 million shares of newly common stock to Adenza owners at the closing, which is expected within six to nine months. These newly issued shares represent 17.4% of Nasdaq’s outstanding shares as of April 26. Furthermore, Nasdaq has obtained fully committed bridge financing for the cash portion of the deal. It intends to issue $5.9 billion of debt between signing and closing, replacing the bridge commitment with the proceeds. However, following the announcement, Nasdaq’s shares took a plunge, trading 11.3% lower in afternoon trading. This downturn marked the company’s largest one-day decline since 2013. Yet, despite this immediate sell-off, Lau sees it as a buying opportunity for long-term investors and encourages them to consider the long-term impact.
Complementing Nasdaq’s SaaS Revenue Objective
Nasdaq has been gradually transitioning towards becoming a SaaS technology provider, targeting SaaS revenue to account for over 50% of its annual recurring revenue (ARR) objective by the fourth quarter of 2027. The acquisition of Adenza is expected to supercharge this transition, contributing to its SaaS strategy. As of now, revenue from Nasdaq’s solutions unit, where Adenza will be placed, constitutes 71% of its $914mn net revenues.
The Potential of Adenza
Adenza’s inclusion is expected to add significantly to Nasdaq’s portfolio, offering a more complete suite of essential software and technology solutions for risk management and regulatory compliance. The acquired firm, consisting of AxiomSL and Calypso Technology, two well-known brands in capital market technology, is projected to have $590 million in revenue in 2023 with an 18% annual recurring revenue growth rate.
Impact on Nasdaq’s Competitive Stance
Nasdaq Chief Executive, Adena Friedman, emphasizes that the acquisition will aid financial institutions in navigating increasingly complex market dynamics. However, Standard & Poor’s downgraded Nasdaq’s rating by a notch to triple B, noting that although the acquisition is significant, it isn’t transformational and will not substantially change Nasdaq’s relative strength compared to its key competitors. Even so, it’s seen as a continuation of Nasdaq’s strategic move towards more stable revenue streams such as data and risk management.
Reducing Debt and Ensuring Future Growth
This deal is also expected to increase Nasdaq’s debt. The company is set to raise about $5.9bn in new debt from a group of banks led by Goldman Sachs and JPMorgan to finance the purchase. S&P downgraded Nasdaq’s rating in light of the increased debt size post-acquisition. Nevertheless, Nasdaq aims to reduce its debt from 4.7 times earnings before interest, taxes, depreciation, and amortization (EBITDA) to a planned 3.3 times EBITDA following the acquisition. Nasdaq’s management is confident in its ability to maintain its investment-grade status while bolstering earnings per share growth by the end of the second year of its ownership. In addition to this, Adenza is expected to generate $590 million in revenue and $300 million in cash flow in 2023, contributing positively to Nasdaq’s financial profile.
While Nasdaq’s share price has seen short-term volatility following the announcement, analysts emphasize the long-term potential of this acquisition. Nasdaq’s ambitious pivot towards becoming a leading SaaS technology provider, its strategic intent to broaden its offerings and penetrate deeper into the market, along with the projected synergy benefits all posit a promising outlook for the company in the years to come. This acquisition represents not just an integration of two companies but also a strong commitment to addressing the growing demands in compliance, regulation, and risk management in the financial services industry. As such, it signifies a transformational chapter in Nasdaq’s journey, reinforcing its position as a technology-driven, innovative leader in global finance.