Investors greeted Nasdaq’s deal to buy International Securities Exchange, the US options business of Deutsche Börse, with some scepticism on Thursday, sending Nasdaq’s shares down as much as 3.5 per cent.
The acquisition for $1.1bn in cash and debt is the largest for the US exchanges operator in nearly a decade and will extend its leading share in the highly competitive US options market.
It comes as Deutsche Börse is closing in on a merger with the London Stock Exchange Group, although Atlanta-based Intercontinental Exchange has signalled that it may make a bid to try to break up the deal. Chicago’s CME Group has also been linked with bids for its two European rivals.
The deal gives Nasdaq about 40 per cent of the market for US equities options where more than a dozen exchanges fight for business. ISE operates three equity options markets with a combined market share of 15 per cent. Nasdaq said bringing the two options businesses together will mean more competitive pricing in the industry.
“The main concern here is that this is the options market and, at the end of the day, it has been very competitive,” said Ashley Serrao, market structure analyst at Credit Suisse. “Other competitors are on the horizon who may be entering the space and are we going to trigger a price war.”
Rivals are competing over a shrinking pie. Options volume in 2015 totalled 4.14bn contracts, a 2.9 per cent decrease from 2014, even as volatility returned to the stock market, according to Tabb Group.
Mr Serrao said these concerns were somewhat mitigated by the potential to exceed cost savings projected in the deal, which Nasdaq targets to be at least $40m on an annualised basis by the time the deal closes in 18 months.
At midday in New York, Nasdaq shares were down about 1.5 per cent.
The purchase is Nasdaq’s biggest acquisition since it bought Nordic stock market operator OMX for $3.7bn in 2007.
Nasdaq said that it did not expect the deal to have a significant effect on its leverage, dividend or share buyback programmes, but some analysts were unconvinced.
The deal will raise Nasdaq’s leverage to 3.1 times gross debt to earnings before interest taxes depreciation and amortisation, but the company has put a priority on reducing that to 2.3x to 2.7x.
Nasdaq “has a strong history of deleveraging and we expect it to reach its target within a year of transaction closure, but until then we do not expect any meaningful shares repurchases”, said Peter Lenardos, an analyst at RBC Capital Markets, in a note.
The exchanges operator suspended share buybacks in 2013 when its leverage rose after acquisitions, but resumed them the following year.
As part of the deal Nasdaq will double its stake in The Options Clearing Corporation, the world’s largest equity derivatives clearing corporation, to 40 per cent. The deal excludes Deutsche Börse’s stake in Bats Global Markets, the exchanges operator, and Digital Asset Holdings, a US blockchain start-up.