After a process that apparently started three years ago, Icap has finally pulled off what might turn out to be the deal of the century with the purchase of EBS for a cash consideration of $775 million.
Barring any regulatory hiccups, Icap will finally get its hand on what is still the FX spot markets predominant broker. Several market sources believe Icap has got a bargain, a fact underlined by an immediate 12% rise in Icaps share price following the announcement. As Philip Middleton, an analyst at Merrill Lynch, wrote in a brief note after the deal was announced: We believe that the strategic benefits of the deal are clear, as we have argued before, and the price looks very reasonable in the context of other exchange-like valuations. The lack of alternative buyers EBSs 13 shareholders absolutely refused to entertain any approach from venture capitalists means that Icap appears to have had a fairly free run at its target.
In a press statement announcing the deal, Michael Spencer, Icaps chief executive, said: We are very pleased to have reached agreement to acquire EBS. The company enjoys a strong market position in interdealer spot foreign exchange, with a very broad customer base. In addition, we will benefit from EBSs well qualified and experienced management and staff and we welcome them to Icap.
Spencer added: Our aim is to combine EBSs strengths in electronic spot foreign exchange with Icaps electronic broking business to create a single global multi-product platform with further growth potential and significant economies of scale. This platform will provide customers with more efficient electronic trade execution, reduced integration costs and give access to broad liquidity across a wide product range.
Jack Jeffery, EBSs chief executive, says: Our strategy is completely consistent with Icaps. We firmly believe that the integration of EBS and Icap is good for both organizations, good for our customers and good for the market as a whole.
Icap says it believes it can extract annual synergies of at least $32 million by combining EBS with its existing electronic broking businesses, specifically the BrokerTec fixed-income platform. EBS senior management, including Jeffery, will remain running the business within the Icap Group. Jeffery will be chief executive of Icaps global electronic division.
Icap says the acquisition is expected to be accretive to its 2006/07 adjusted earnings per share. The purchase has been the subject of widespread speculation since some details leaked to the press in January. The time taken to conclude it has led to many theories about the intentions of the shareholders. A popular one was that they were now happy to cash in their investment in EBS, which went live in 1993, and to try to direct spot volumes to their own platforms.
Such conspiracy theories suggest that while Icap might well have a bargain, turning EBS into a properly run, commercial business will not be without difficulties. However, while EBS has had to face up to challenges to its dominant position as the main liquidity provider to the spot FX market, Icap might take heart from the lessons of what has occurred in the US equity market.
There, the incumbent execution venues appear, after some considerable pain and forced changes, to have cemented their positions. Now that it is removed from the shackles imposed by its shareholders, EBS looks better placed to thrive than it did a year ago.