Nobody Wants Nasdaq at 11.6 Times Net With Hot Option: Real M&A

NYSE-Deutsche Boerse Deal Leaves Nasdaq Least Wanted
Shares of Nasdaq, the New York-based owner of 12 markets cobbled together in the past five years, sell for about 11.6 times each dollar of estimated profit for 2011, according to data compiled by Bloomberg. Photographer: Paul Goguen/Bloomberg

For all the acquisitions being struck by exchanges around the world, no bourse is less wanted than Nasdaq OMX Group Inc.

Shares of Nasdaq, the New York-based owner of 12 markets cobbled together in the past five years, sell for about 11.6 times each dollar of estimated profit for 2011, according to data compiled by Bloomberg. That’s less than every other publicly traded bourse and about half the price that the average securities exchange commands. Nasdaq has also borrowed more money relative to its equity than any exchange that hasn’t already reached a merger agreement, the data show.

While NYSE Euronext’s Duncan Niederauer sold the 219-year-old company to Deutsche Boerse AG to create the world’s largest exchange, Nasdaq Chief Executive Officer Robert Greifeld still faces the task of boosting returns for shareholders who lost money in the past five years as rivals gained 44 percent. Nasdaq hasn’t grown fast enough to attract the largest remaining standalone markets in the U.S., IntercontinentalExchange Inc. and CME Group Inc., according to Capstone Global Markets LLC.

“You aren’t going to do a deal just because your peers are doing a deal,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global in New York. “You want to grow your market share. If you look at the growth profile of the Nasdaq relative to ICE or CME, it’s fairly low. That point shouldn’t be lost. I don’t think ICE or CME are going to sacrifice their shareholders just to weed out costs.”


Silvia Davi, a Nasdaq spokeswoman, declined to comment.

Deutsche Boerse’s $9.53 billion takeover of New York-based NYSE Euronext was announced yesterday, less than a week after London Stock Exchange Group Plc agreed to purchase TMX Group Inc. of Toronto for about $3.1 billion. In October, Singapore Exchange Ltd. offered $8.3 billion for Sydney-based ASX Ltd., which runs the Australian stock market.

Hong Kong Exchanges & Clearing Ltd., currently the world’s biggest exchange operator at $23.1 billion in market capitalization, said last week that it’s open to “alliances, partnerships and other relationships.”

While the deals have fueled speculation of more mergers and acquisitions, investors haven’t been willing to reward Nasdaq with a higher valuation. The company’s stock closed at $28.28 yesterday, giving it a market capitalization of $4.97 billion, data compiled by Bloomberg show.

Relative Value

On a per-share basis, Nasdaq trades at about 11.6 times analysts’ estimates for $2.45 in profit this year. That’s less than the average multiple of 19.4 times for all publicly traded exchanges, data compiled by Bloomberg show. NYSE Euronext trades at 15.1 times, while Atlanta-based ICE, the second-largest U.S. futures market, is valued at 19.6 times.

Bourses outside the U.S. command even higher multiples. Singapore Exchange shares trade at 23.9 times, while Sao Paulo-based BM&FBovespa SA, the operator of Latin America’s biggest securities exchange, sells for 17.3 times estimated profit, data compiled by Bloomberg show.

Hong Kong Exchanges is the most valuable, with investors paying 35.6 times projected profit, or three times more than what they’re willing to spend for Nasdaq, the data show.

A devalued share price makes it harder for Nasdaq to use its own stock as currency in any deal without eroding the value of existing owners’ claims on earnings, according to David Goerz, the San Francisco-based chief investment officer at Highmark Capital Management Inc., which oversees $17 billion and owns shares of Nasdaq.

‘Have Some Edge’

“For Nasdaq, given that they’re the cheapest of the group, it’d be very hard for them to step up and buy a higher PE company because that would dilute shareholders,” said Goerz. “It’s going to become increasingly difficult to compete in the exchange world unless you have some edge, some market that you dominate, some unique product.”

Nasdaq may still go after CBOE Holdings Inc., the largest U.S. options market in 2010, to gain its derivatives business, according to Thomas Caldwell, chief executive officer of Caldwell Securities Ltd. in Toronto. With its affiliates, the firm oversees about $1 billion, including shares of Deutsche Boerse, NYSE, CBOE, LSE and TMX.

“CBOE should be part of another exchange,” he said last week. “Some exchange should be looking at CBOE to become a factor in options. It could be Nasdaq.”

Gail Osten, a CBOE spokeswoman, declined to comment.

Nasdaq and Chicago-based CBOE rallied two days ago on speculation they may be the next exchanges to be purchased, according to Patrick O’Shaughnessy, an analyst at Raymond James & Associates Inc. in Chicago.

CFO Resignation

Shares of Nasdaq retreated 4.6 percent to $28.28 yesterday after the company announced its chief financial officer, Adena Friedman, will quit to take the same role at Washington-based Carlyle Group, the world’s second-largest buyout firm. The stock gained 0.7 percent to $28.47 today.

Nasdaq may ultimately attract takeover offers because its stock is so cheap, according to William Karsh, former chief operating officer at Jersey City, New Jersey-based Direct Edge Holdings LLC, the third-largest U.S. equity exchange.

“They’re there to be acquired,” he said.

Options traders betting on larger share moves are pushing up prices for Nasdaq contracts at the fastest rate in five years. Implied volatility, the key gauge of option prices, for at-the-money options expiring in 30 days has surged to 43.08 from 22.9 on Feb. 4, the steepest eight-day gain since August 2005, according to data compiled by Bloomberg.

Skew Tumbles

Nasdaq skew, a measure of prices for puts to sell versus calls to buy, tumbled to the lowest level since July 2007 today, exceeding yesterday’s 19-month low, as investors paid more for bullish positions. Call volume soared Feb. 9 to a one-year high of 16,422 contracts, enough to buy 1.64 million shares if all contracts were exercised.

“People expect a big move in the stock, and it looks more bullish than bearish,” said Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options market analytics.

An exchange buying Nasdaq would have to take on more debt relative to equity than any other bourse that isn’t already in merger talks. Nasdaq had borrowings equal to 49 percent of its common equity, data compiled by Bloomberg show. The industry average is 18 percent.

CBOE doesn’t have any debt, the data show.

Nasdaq also earned less before interest and taxes per dollar of sales than any bourse that hasn’t already agreed to a takeover. The company had an operating margin of less than 20 percent in the past year, versus the average of 48 percent. Hong Kong Exchanges earned 82 cents per dollar of sales, while CME and ICE both turned more than 50 percent of revenue into operating income.

Air Products

Elsewhere in mergers and acquisitions, Air Products & Chemicals Inc., after a Delaware judge upheld Airgas Inc.’s main anti-takeover defense, dropped its $5.9 billion hostile bid for the packaged-gas supplier. Air Products had pursued Radnor, Pennsylvania-based Airgas for more than a year. Delaware Chancery Court Judge William B. Chandler III yesterday rejected Air Products’ claim that Airgas’ poison-pill defense was flawed.

CB Richard Ellis Group Inc., the world’s biggest commercial property broker, agreed to buy the majority of ING Groep NV’s global real estate investment management unit for about $940 million as the Dutch bank and insurer seeks to reduce property-related risk. CB Richard Ellis of Los Angeles will purchase businesses from ING Real Estate Investment Management, or REIM, with 44.7 billion euros ($60.5 billion) in assets, Amsterdam-based ING said in a statement yesterday.

There have been 2,979 deals announced globally this year, totaling $261.8 billion, a 27 percent increase from the $205 billion in the same period in 2010, according to data compiled by Bloomberg.

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