Nasdaq OMX Group Inc agreed to buy electronic Treasuries-trading platform eSpeed from BGC Partners Inc for $750 million in cash, providing the exchange operator an entry into one of the world's largest and most liquid cash markets.
The deal gives Nasdaq more exposure to fixed income markets, fitting into the company's strategy of expanding in asset classes beyond stock trading, where volumes have been depressed for years.
More than $500 billion in U.S. Treasuries change hands daily.
The acquisition helps to diversify Nasdaq's U.S. offerings, said Christopher Allen, an analyst at Evercore Partners.
"You always want some asset class diversification which Nasdaq really doesn't have in the U.S., where they just have cash, equity and equity options," he said.
Nasdaq plans to offer customers increased access to fixed income products and a greater variety of trading instruments as a result of the acquisition, Chief Executive Robert Greifeld said on a call with analysts.
The total consideration for the deal is up to $1.23 billion, including an earnout provision that could pay out up to $484 million in Nasdaq OMX common stock over 15 years, BGC said.
Greifeld and Howard W. Lutnick, chairman and CEO of BGC Partners, have been in informal talks about a possible deal for the past few years, according to two sources familiar with the situation, who declined to be identified because they are not allowed to speak to the media.
But these people said the conversations heated up late last year after IntercontinentalExchange Inc announced it was buying Nasdaq rival NYSE Euronext for $8.2 billion.
Two spokeswomen for BGC were not immediately available to comment. Nasdaq had no comment.
BGC was spun off from Cantor Fitzgerald in 2004.
Nasdaq said last month it planned to create a market for trading shares of unlisted companies in a joint venture with trading platform SharesPost Inc. And it announced in December it was buying Thomson Reuters Corp's investor relations, public relations and multimedia services units for $390 million.
Pushing the envelope
The eSpeed deal is expected to add to Nasdaq's earnings within the first twelve months after closing - expected by mid-2013 - the exchange operator said.
The risk for Nasdaq, however, is that it is buying eSpeed at a time when trading Treasuries might be at a cyclical low, Evercore's Allen said.
The U.S. Federal Reserve has been buying large amounts of Treasuries through its quantitative easing program. The result is that rates have stayed low and volatility and trading volume have been capped.
Greifeld, however, said government intervention would eventually cease, leading to a positive impact on volume. The United States is also issuing more debt, boosting the market for Treasuries, he said.
Most Wall Street economists do not expect the Fed to begin curtailing its asset purchases for another year. Short-term interest rates, which have been stuck near zero since December 2008, are not forecast to rise until 2015, the Fed's latest projections show.
Nasdaq currently offers Treasury options trading in the United States and is close to launching NLX, a Europe-based fixed-income futures trading platform to compete with Deutsche Boerse AG-owned Eurex and NYSE's London-based Liffe.
The deal differentiates Nasdaq in fixed income from other exchange operators, which have mainly been focused on interest rate swap clearing and swaps-like futures trading, said Will Rhode, a fixed income analyst at Tabb Group. "We really see Nasdaq pushing the envelope on different approaches to the fixed income markets," Rhode said.
Nasdaq plans to spend the next several weeks talking to customers and learning about what other products they want to access on an electronic trading platform, Greifeld said. "The easiest low hanging fruit is in the U.S. Treasury marketplace," he said.
Nasdaq expects to fund the purchase with cash on hand and long-term debt.
Following the deal, Moody's Investors Service said it was reviewing Nasdaq's Baa3 bond rating for a possible downgrade.
Deutsche Bank was Nasdaq's financial adviser on the deal.
Shares of Nasdaq closed down 0.9 percent at $32.01 on Monday. The deal was announced after the market closed.
Shares of BGC were up 92 percent in after-hours trading following the deal's announcement.