By Alexander Osipovich
The revelation that the owner of the New York Stock Exchange
approached eBay Inc. about a possible takeover -- only to dump the
idea after an investor backlash -- stunned observers on Wall Street
and beyond.
But it shouldn't be surprising given the transformation of the
exchange business over the past decade. Once focused on running
markets, exchange operators such as NYSE parent Intercontinental
Exchange Inc., or ICE, have increasingly evolved into data and
technology companies -- and the exploration of a deal with eBay
suggests executives are intent on further transformation.
"Their core business is very slow-growing," said James Angel, a
finance professor at Georgetown University. "That's why exchange
operators have been on the acquisition prowl."
Companies like ICE, Nasdaq Inc. and London Stock Exchange Group
PLC are now diversified multinationals. They don't just run
marketplaces and invite VIPs to ring the opening bell. They sell
data to brokers and hedge funds, they concoct indexes used by the
$6 trillion global exchange-traded fund industry, and they sell
trading technology. In other words, they try to be indispensable
gears in the machinery of global finance.
A key reason behind that shift is that it isn't attractive to be
a mere exchange anymore.
The traditional way exchanges made money was by collecting fees
for transactions executed on their markets. But that has gotten
tougher over the years, especially in stocks. The number of shares
traded in the U.S. each year peaked in 2009.
Other markets, like futures, have enjoyed stronger volume
growth, and futures exchanges are more shielded from competition
than stock exchanges, so they can charge higher fees. But even for
them, revenues from transaction fees swing up and down
unpredictably with volumes, making them an unreliable driver of
growth.
Hence the appeal of data sales. Not only has the rise of
quantitative trading increased demand for all sorts of financial
data, but exchanges generally sell data on a subscription basis,
making it a more predictable revenue stream. That has led them to
step up their offerings of pricing data, as well as related
products like indexing and analytics.
In 2019, U.S. exchange groups made 26.3% of their net revenue
from information services, up from 18.1% in 2014, according to
Burton-Taylor International Consulting, a TP ICAP company.
For ICE, the share rose to 35.9% from 20.1% over the same
period, according to Burton-Taylor. Much of that increase was due
to Atlanta-based ICE's last major deal: its $5.2 billion
acquisition in 2015 of Interactive Data Corp., a bond-data
provider.
Mining eBay's marketplace for data appears to have been part of
the thinking behind ICE's now-aborted pursuit of the e-commerce
company.
On an earnings call Thursday, ICE Chairman and Chief Executive
Jeffrey Sprecher repeatedly mentioned data when discussing his
thinking about eBay.
"Our ability to handle massive amounts of data securely,
efficiently, put it in a database, sort it, search it, manipulate
it, cleanse it and give it back out to people is a core talent that
we have here," Mr. Sprecher said when asked about how a
consumer-facing business like eBay would fit into ICE.
ICE likes to think "outside the box" when considering possible
acquisitions, he added.
Most big exchange deals in the past two decades followed a
pattern: They bought other exchanges to amass scale and diversify
into new markets.
ICE itself used that playbook to become a $50 billion empire.
Besides the NYSE, its acquisitions over the years included the New
York Board of Trade, featured in the 1983 Eddie Murphy comedy
"Trading Places" as the site of a fictional manipulation scheme in
frozen concentrated orange-juice futures.
But exchange deals have gotten tougher as the industry has
consolidated, while regulators and national pride have foiled
proposed cross-border transactions. In October, Hong Kong Exchanges
& Clearing Ltd. dropped its bid to buy the London Stock
Exchange, and the European Union in 2017 blocked a proposed merger
between Deutsche Börse AG and London Stock Exchange Group.
ICE's approach to eBay wasn't the first time an exchange
operator eyed opportunities in the consumer space. Nasdaq -- whose
fastest-growing business is selling markets technology -- agreed
last year to provide its technology to a U.K. soccer-betting
platform.
But with eBay worth more than $28 billion, an ICE takeover of
the company would have been an unprecedented foray into retail for
an exchange operator that has mainly catered to banks, trading
firms and corporate clients during its 20-year history.
Investors were flummoxed by the deal's potential price tag. They
also questioned the wisdom of ICE acquiring an online marketplace
that won fame in the 1990s as an auction site for Beanie Babies and
other collectibles, but has since fallen behind rivals such as
Amazon.com Inc.
Reflecting investors' displeasure, ICE's stock price fell as
much as 13% in the days after The Wall Street Journal first
reported on the overtures to eBay. ICE shares rebounded Friday,
after the company abandoned its pursuit of eBay, but they are still
down 7.4% from their closing value on Monday, the day before the
news broke.
On the earnings call, Mr. Sprecher cited ICE's track record of
making astute acquisitions and turning around underperforming
assets. "We're not crazy," he told skeptical analysts.
Hours later, ICE said it was no longer pursuing eBay.
Write to Alexander Osipovich at
alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
February 09, 2020 08:39 ET (13:39 GMT)
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