Nasdaq Acquires Adenza: Thoma Bravo Is The Real Winner

Thesis

Nasdaq (NASDAQ:NDAQ) announced today that it will acquire Adenza from Thoma Bravo in a cash and stock transaction valued at $10.5 billion, sending shares down as much as 10% as shareholders did not like the deal at first glance. However, I think this acquisition is exactly what Nasdaq has said it wants to do, which is to invest in faster growing segments to broaden its offering and improve its long-term positioning. So they're sticking to their strategy, but the price they have had to pay for the high quality business they have acquired could be a problem, especially by giving Thoma Bravo such a large stake in Nasdaq.

Analysis

Adenza consists of two distinct products, Calypso and AxiomSL, which Thoma Bravo merged in 2021 to create Adenza. Calypso provides end-to-end treasury risk and collateral management workflows, while AxiomSL is a leading regulatory compliance software. Both software products are mission-critical for their customers and have won numerous awards in recent years, demonstrating their strength. The list of awards ranges from the best regulatory software to the best stress testing software, to the most innovative regulatory solution. So in the long term, this could really strengthen Nasdaq's competitive advantage over its competitors.

As Nasdaq's strategy is to add new, higher growth companies to its portfolio in order to diversify its business, this acquisition makes sense. They have added two products with strong growth opportunities that are close to their areas of expertise. And they need to find new growth opportunities, as the growth of the stock exchange business is likely to be marginal. And if we look at their old M&A activities with OMX, ISE and Verafin, they were value adding. And Nasdaq is always talking about its long-term focus, so this acquisition fits perfectly with their strategy.

Thoma Bravo

Thoma Bravo is a private equity firm that bought Calypso for $3.7bn in 2021 and merged it with AxiomSL, which they bought in 2020 for around $2bn or 40x EBITDA or 15x revenues. So all in all, Thoma Bravo probably paid $5.7 billion, and now, three years after acquiring AxiomSL, they will get almost double that. That's a very nice return for them.

They will receive $5.75 billion in cash, which is roughly what they paid for the two companies at the time, and they will also receive 85.6 million shares of Nasdaq stock, representing ~14.9% of the outstanding shares. I have to say that I think they're the clear winners in this transaction. They have no downside risk now because they have got their acquisition costs out and the Nasdaq stake could turn into something even bigger in the future and they will get the dividends every year. With this transaction, Thoma Bravo has clearly shown that they know how to add value to their business, but how will they act on the Nasdaq board? Will they take a long-term view or will they try to extract value from Nasdaq?

Another major shareholder, Investor AB (OTCPK:IVSXF), which has held 11.8% in terms of votes and capital since 2011, is one of the best long-term capital allocators from Europe. Will they and Thoma Bravo follow the same strategy or will there be different opinions? Although I think Investor AB has thought this acquisition through very carefully, as I see them as something like the Warren Buffetts of Sweden with an incredibly good long-term track record in terms of capital allocation, I still have to wonder about the price tag.

Valuation

$10.5 billion for a company expected to generate $590 million in revenue in 2023 is 16 times revenue, which is very expensive. And taking into account the 58% EBITDA margin, this is $590m x 58% = 342m or ~30x EBITDA. By both measures, this is a huge price to pay, even if we factor in the 15% rev growth rate.

Nasdaq is a $25 billion market cap company making a $10.5 billion acquisition, resulting in a large increase in net debt. This is one of those acquisitions that could really have an impact if the synergies or the growth rates are not as expected.

I actually thought that Nasdaq was trying to reduce leverage, but this transaction is the opposite. Leverage is now at 4.7x, but they expect to reduce it to 4.0x over the next 18 months and to 3.3x in 36 months. But that has obviously reduced the financial flexibility for the next years.

Opportunities

The acquisition of Adenza is expected to be accretive to Nasdaq's gross margins through its 90% gross retention rate, 115% net retention rate and 80% recurring revenue mix. In addition, SAM will increase by 40% to $34 billion and the growth outlook will increase from 7%-10% to 8%-11%, a small increase of 1% in the growth outlook. I would have expected more from an acquisition that alone represents almost 40% of Nasdaq's market capitalization. The increase in SAM is great, but the growth outlook, which may be conservative, is less than I would have liked.

The run-rate synergies, estimated at $100 million in the long term, also are rather small for such a big deal. However, I think that most of the statements are conservative and that the real opportunities could be much greater, also in terms of cross-selling opportunities. Adenza clearly has something to offer them through its European focused banking relationship and Axiom SL's leading position in risk management, where Nasdaq is looking to grow.

Nasdaq, which is moving away from its old transcational and cyclical business model to a more recurring revenue model, will move closer to this step with this acquisition, although the majority of its revenues are already recurring.

Conclusion

At first glance, I'm not a big fan of the deal as I think the price they paid is probably too high, even though Adenza is a really strong company. However, Nasdaq has reiterated that it will continue with its capital deployment plan, which includes increasing the dividend per share to a long-term payout ratio of around 35%-38%. They also plan to buy back shares to offset the dilution from this deal, but it will be interesting to see how this plays out as the pre-tax cash flow added by this acquisition is only $300m.

As I'm an indirect shareholder through my shareholding in Investor AB, I hope that they will talk about this deal, as they are, as I said, known for their long-term thinking. Normally they only do very well thought-out deals, but this price looks relatively high at the moment. But that was also the case when Google bought YouTube. But at this point, I tend to think it was the better deal for Thoma Bravo.

In terms of my old thesis on Nasdaq shares, I would reiterate my HOLD position because I think the new debt position and the new major shareholder have a relatively big impact on the company. And I need time to see how they will act and how this will play out. Nasdaq's business is still high quality, but the new shareholder, especially being a PE firm, could lead to major changes in the future.