Macaskill on markets: NEX's Michael Spencer – a title for the billion dollar broker?

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By:
Jon Macaskill
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A sale of NEX will generate close to a billion dollars for brokerage founder Spencer. Will it also bring him closer to the aristocratic title he craves?

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NEX announced in March that it had been approached by CME Group about an acquisition. CME dwarfs NEX in size – the Chicago exchange group has a market capitalization around $55 billion, while its London-based electronic dealing and post-trade servicing target NEX was valued at around £2.5 billion before news of a possible bid leaked.

Michael Spencer owned 17.37% of NEX after he completed the sale of its voice hybrid brokerage business to Tullett Prebon at the end of 2016, and repositioned the business he had founded in 1986 as Intercapital (which later morphed into Icap).

NEX comprises the FX and bond electronic brokerage platforms from the former Icap, along with a variety of post-trade processing services.

Spencer rebranded NEX as a financial technology company in the way that has become fashionable for trading-dependent firms attempting to boost their stock prices. This trend has spread to big banks such as Goldman Sachs as well as a bewildering array of fintech start-ups.

NEX is certainly a major player in electronic broking and processing, but its share price was underpinned by the potential for a takeover bid from a bigger exchange firm.

That approach finally emerged, bringing a payout close to $1 billion for Spencer.

Spencer takes his bonus payments as NEX CEO in shares, so his ownership in the firm was around 18%, or £450 million when news of a potential CME bid emerged.

NEX shares immediately rose by over 30%, giving Spencer a paper gain of roughly £150 million. The CME’s agreed bid of £10 arrived in late March and there is a chance that a further premium could be added before an eventual sale, if further suitors emerge before a targeted close in the second half of the year.

International Exchange (ICE) and Deutsche Borse were viewed as potential competitors for CME Group in any battle for NEX, given their financial firepower.

NEX would need to see a slightly more aggressive winning takeover bid for the value of Spencer’s shares to rise to around £700 million and make him the equivalent of a billion dollar broker from a sale (at current exchange rates).

Multiples on some acquisitions in the sector suggest that the required valuation of NEX at a share price over the agreed £10 is not too farfetched, however.

Nasdaq bought eSpeed in 2013 for $750 million, which valued the electronic Treasury platform at around 7.5 times annual revenue or 11 times profit, for example. And the sale of FX platform 360T to Deutsche Borse for around $800 million in 2015 was made at a revenue multiple of almost 13 and roughly 25 times earnings.

A valuation at the higher end of these revenue multiple ranges for the NEX Markets unit that houses the FX platform EBS and its bond counterpart BrokerTec could be used to justify a price of over £10, before factoring in the worth of post-trade processing businesses such as TriOptima and Traiana.

So Spencer’s billion dollar pay day is arguably within reach, especially if he can deploy the broking skills that have already generated a substantial personal fortune.

Whether all this money will finally buy Spencer the recognition that he craves from the British establishment is a moot point.

The question of what makes Michael run is complicated.

Snobbery

Money is clearly the simplest answer. Respect from others in the City of London was a secondary goal that was accomplished over time. Brokers are often viewed with disdain in the City and Spencer was keen to combat the snobbery that fuels this opinion by pointing out that he attended Oxford University after boarding school.

He drops Latin tags into conversation, in an apparent bid to differentiate himself from the rougher-edged brokers of the popular imagination, though he has also been quick to praise the scrappy nature of his employees.  

Intercapital was the first inter-dealer brokerage devoted primarily to over-the-counter derivatives trading, which made Spencer dependent on a new breed of City banker in the 1980s and 1990s. Derivatives specialists, often from outside the UK, did not necessarily share a social bias against brokers, but their emphasis on advanced degrees and mathematical ability nevertheless maintained a gap between brokers and clients, even as interest rate swap broking adopted techniques from older markets, such as extensive use of hospitality to keep customers happy.

Spencer developed close ties to bankers who were in the ascendant as derivatives trading revenues rose, such as Michael Sherwood, the Goldman Sachs partner who retired as co-head of the bank’s international operations last year.

Spencer also served as treasurer of the Conservative party and formed a bond with David Cameron, the British Prime Minister from 2010 until 2016.

That relationship, combined with Spencer’s significant fundraising through Icap charity days through the decades, would normally be enough to guarantee recognition in the form of a British title.

An attempt by Cameron to provide Spencer with a peerage in 2016 failed, however. Cameron resigned after losing the Brexit vote in June, after which he submitted a departing list of proposed honours for supporters. The process is not fully public, but a peerage for Spencer was reportedly blocked on ethical grounds.

That was presumably related to the £55 million fine paid by Icap in 2013 for the involvement of its brokers in Libor manipulation, rather than a judgment call on the more creative forms of hospitality provided through the years.

It has nevertheless reduced Spencer to dwelling at length on the two times Icap won the Queen’s Award for Enterprise in his current online biography as CEO of NEX.

“The award is formally conferred by a Grant of Appointment and is symbolised through a presentation given by Her Majesty's Lord Lieutenants as The Queen's local representatives,” Spencer notes.

Poignant

It is a poignant observation and we can only guess at the regret Spencer feels as he contemplates what might have been: donning the robes to take up his own peerage in the House of Lords, or even just a visit to Buckingham Palace to receive a knighthood.

We may also never know what title he planned to adopt. Lord Libor had already been used by one of Spencer’s junior Icap subordinates as a nickname, but Baron Worth would have had a nice ring to it, while also nodding to his school days at Worth Abbey.  

A billion dollar payout from the sale of NEX to an exchange group may provide some consolation for Spencer. And as a keen student of history who no doubt prefers the King James version of the bible, he will know that the race is not to the swift nor yet favour to men of skill.  

Time and chance, and some judicious charitable giving could still eventually bring Spencer the title he craves to add to his riches.