Nasdaq Acquires Adenza at a Hefty $10.5 Billion Price Tag; Fair Value Estimate Reduced to $55

Narrow moat-rated Nasdaq NDAQ announced that it intends to acquire Adenza, a provider of risk management and post-trade reporting software, for $10.5 billion. Nasdaq intends to pay for the deal with a mix of $4.75 billion in cash and by issuing more than 85 million shares. The deal will leave Thoma Bravo with nearly 15% of Nasdaq and the other firm will be able to nominate Holden Spaht to Nasdaq’s board.

We do appreciate the underlying strategy behind the deal and Adenza is an attractive asset. Adenza benefits from the increasing regulatory reporting and risk management needs of major banks and brokerages, allowing the firm to drive double-digit revenue growth. These trends are unlikely to diminish and Adenza does have a long runway of high-margin, recurring revenue growth ahead of it.

However, we have serious reservations about the price Nasdaq has chosen to pay for the asset. Adenza expects to generate $590 million in revenue in 2023, up from $519 million in 2022, meaning that Nasdaq is paying almost 18 times forward revenue for the company. This also translates to 31 times estimated 2023 EBITDA or 26 times if adjusted for Nasdaq projected expense synergies. This means that it will take considerable time or an acceleration in revenue growth for Nasdaq to justify its investment. The company is expecting the deal to become earnings accretive within two years, but this does not account for the considerable amount of debt Nasdaq is taking on to facilitate the deal, with the company planning on issuing $5.9 billion in new debt if the deal is approved. This will leave the firm at 4.7 times leverage, well above previous high points following other acquisitions.

As we incorporate the impact of the deal into our model, we are reducing our fair value estimate for Nasdaq from $58 to $55. A $4 negative adjustment from the proposed acquisition was partially offset by a $1 positive adjustment due to the time value of money since our last update.