From 2008 to 2010, Nasdaq OMX Group Inc. (NDAQ) paid $5.7 billion for eight corporate acquisitions. Its shareholders have little to show for them. Today Nasdaq’s stock market value is about $4.8 billion.
Now the company is attempting its biggest deal ever: an $11.3 billion bid with IntercontinentalExchange Inc. (ICE) for NYSE Euronext (NYX), for which Nasdaq would contribute a bit less than half the purchase price, some of it borrowed. There’s been a strong whiff of urgency about their effort, too.
Twice this month NYSE’s board has rebuffed the offer, citing antitrust concerns and other reasons, in favor of a $9.5 billion deal with Deutsche Boerse AG (DB1) to which it already had agreed. Nasdaq and ICE show no sign of giving up and are appealing directly to NYSE’s shareholders, some of whom surely would appreciate the chance to vote on the matter themselves.
Nasdaq this week said it would cut annual listing fees on the New York Stock Exchange by 10 percent, in a bid for support from its rival’s customers. It has promised to keep the stock exchange’s iconic trading floor open. The company’s executives say they’re meeting with Justice Department officials in hopes of heading off antitrust worries. Nasdaq and ICE also have proposed a $350 million breakup payment to NYSE should regulators nix their offer.
All of this is a long way of saying they want this deal badly. Each of the bidders is pursuing a roll-up strategy, meaning they’re relying on acquisitions of other companies to drive their growth. The problem with roll-ups is they often hit a wall once they run out of targets to buy, unless they can sell themselves to another consolidator first, as NYSE is attempting. A single bad deal, capped by a big write-off showing that management overpaid, can cripple a company’s expansion plans.
One thing to watch is whether Nasdaq may have to write down some of the assets already on its books, especially if its bid for NYSE fails and the company is left alone without a suitor for itself. While Nasdaq executives say writedowns shouldn’t be a concern, the numbers show a balance sheet full of froth.
At $27.48 a share, Nasdaq is trading for 96 percent of the company’s book value, or shareholder equity, following a 59 percent rise in its stock price since last July, right before the worldwide merger frenzy for exchange operators began. The discount to book value, although slight at the moment, tells you the market remains skeptical of some of Nasdaq’s asset values. ICE and Deutsche Boerse, by comparison, both trade for more than three times book value.
Nasdaq’s books show $5.3 billion of goodwill, which exceeds the company’s $5 billion of equity and represents almost a third of its total assets. Goodwill isn’t a saleable asset. It’s the ledger entry a company records when it pays a premium to buy another. Specifically, it’s the difference between the purchase price and the fair value of the acquired company’s net assets. Nasdaq’s balance sheet would have us believe the goodwill is worth more than what the market says the whole company is worth. Take away goodwill, and Nasdaq’s book value would be negative.
The company’s assets also include almost $1.8 billion of purchased intangibles, such as licenses and trade names. Like goodwill, most of these assets don’t have to be amortized. That means the company doesn’t have to take quarterly hits to earnings to gradually write them down as it would with, say, a truck.
Nasdaq has been consistently profitable throughout its latest acquisition spree. That may be due as much to the way it allocated the purchase prices for its deals as anything else.
Consider the $5.7 billion Nasdaq paid for the eight deals it completed since the start of 2008. It said the liabilities at those companies, combined, exceeded their tangible assets by $355 million. As a result, it assigned almost $6.1 billion to intangibles, including $4.3 billion for goodwill.
The largest of those purchases was Nasdaq’s $4.4 billion purchase in 2008 of Sweden’s OMX AB, operator of equity markets in seven European cities. The company said OMX’s liabilities exceeded tangible assets by $340 million, and it assigned $4.7 billion to intangibles, including $3.5 billion to goodwill.
To be sure, these aren’t the kinds of businesses that come with lots of hard assets, such as heavy equipment. Even so, the amounts chalked up to goodwill are eye-popping.
Nasdaq’s interim chief financial officer, Ronald Hassen, says there’s no need for goodwill writedowns, notwithstanding the market’s signals. He says the company uses an independent third party to test its values annually, and that the results at its operating segments support the goodwill assigned to them.
If he saw the need to test more frequently, Hassen says he would do it. “We don’t see any form of impairment based on our current performance,” he says.
Then again, if they did, that could mean the end to Nasdaq’s streak of 26 consecutive profitable quarters, dating to late 2004, which has helped fuel the company’s ability to keep making acquisitions. Considering investors’ verdict on what it has bought so far, there’s little room for error.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
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