It’s October, and today officially starts the fourth quarter of 2013. With that in mind, we review the previous month in the forex industry. Following a rather dull summer for news, September saw things pick up with the release of the Bank of Settlement’s (BIS) Triennial FX Survey and several mergers and acquisitions (M&A) taking place. With the wide array of events that took place’ this month’s industry review column will be a two-part affair. Today we focus on the latest M&A while reviewing the rest of September’s activity tomorrow.
How much did Swissquote pay for MIG Bank?
The largest deal that took place was Swissquote’s acquisition of MIG Bank. In its statement about the deal, publically traded Swissquote (SQN.SW) provided few financial details other than, “The purchase of MIG Bank was financed entirely with equity capital. The parties have agreed not to disclose the purchase price.”
What was provided were volume and revenue figures that showed during the first half of the year. MIG Bank averaged about $60 billion in monthly volume compared to $29 billion from Swissquote (in line with our 2012 FX industry research, but substantially above our 2012 estimates). With only 26.2% of its first half total net revenues from its FX operations, Swissquote expects the addition of MIG Bank to push FX revenues to around 50% of the combined companies’ total. Based on Swissquote’s H1 2013 report, we estimate MIG Bank FX revenues to have been around $23 million (after commission expenses) for the first six months of the year. The revenue figures compare to full year trading revenues of nearly $28 million in 2012 and $73 million in 2011. In its 2012 report, MIG Bank reported a loss of $9.4 million as revenues from its trading operation plummeted, even as expenses rose.
Although nearly most of the industry suffered revenue declines in 2012, MIG Bank’s poor results pointed to more than just a reduction of volumes. The financials indicated that MIG Bank suffered a sharp decline in its revenue per million dollars traded ($/m) to well below industry averages, reaching around $40. While seeing volumes and revenues rise in 2013, the above public figures indicate that MIG Bank continues to be achieving thin margins on its trading revenues. The lack of meaningful margin expansion, as well as increased expenses due to its 2012 opening of new headquarters and foreign office expansion, appears to have been the impetus of what drove MIG Bank to put itself up for sale. In this regard, Forex Magnates has also heard that following the announcement of the acquisition, MIG employees are facing a round of pay cuts and downsizing.
Based on the above, Forex Magnates’ research believes that MIG Bank net income for 2013 was set to reverse from the 2012’s losses, but only show small profits. As such, we believe that the MIG Bank purchase resembled that of GFT’s sale to GAIN Capital. In that deal, at the time of the signing, GFT was set to receive around $80 million in cash and notes, as well as $27 million in GAIN shares (the shares have since risen in price). The cash and note portion was in place of the nearly $80 million GFT held in surplus equity. As such, in their deal presentation, GAIN Capital pitched to shareholders that in reality, very little cash was being transferred, with only a net purchase price of $27.8 million in equity. In many ways, the GFT sale was more of a way for owners to cash out the firm’s equity than a valuation based sale.
Forex Magnates believes that MIG Bank was acquired with a similar structure; owners withdrawing the broker’s excess equity (around $40-50 million), while receiving a small premium in Swissquote shares. Using the GFT deal as an example, where the broker also reported a 2012 loss, it is reasonable to believe that the equity portion in the MIG Bank deal was in the $15-25 million range.
For Swissquote, it marks the second ‘fire sale’ acquisition, as it also bought Advanced Currency Markets (ACM) in 2010 as the broker faced difficulties meeting new Swiss licensing requirements.
FXCM Assumes Alpari’s US MT4 Book
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One of the bigger stories of the month was Alpari’s retail exit from the US market. Acquiring their US MetaTrader 4 book was FXCM. When announcing the news, FXCM used the language of “FXCM to Assume” and withheld from reporting financial terms. As such, we believe that FXCM paid little to nothing for Alpari’s US customers, with Alpari becoming a broker partner, and being compensated based on future customer trading volumes. With US client assets of around $10 million and monthly volumes estimated at $4 billion, this amounts to around $360K a month, with a lifetime value of less than $1 million.
FXCM Acquires Majority Stake in Faros Trading
Another deal that FXCM announced during the month, and withheld financial information, was its acquisition of a 50.1% stake in Faros Trading. A provider of trader research and analysis, the deal is expected to provide additional services for FXCM clients. As FXCM didn’t provide financial details, Forex Magnates believes the deal involved less than $1 million. Most likely, the deal was formulated as a product distribution agreement, with FXCM receiving equity in lieu of granting Faros access to market their products to the broker’s client base.
In a bit of a twist, Faros Trading Founding Partner, Mark Galant, was the founder of GAIN Capital and remains a major shareholder. Therefore, the conspiracy theorist part of us also believes that after GAIN Capital rejected FXCM’s unsolicited takeover, this was a way for FXCM’s management to extend its control in the market.
ILQ Acquires Velocity Futures Customer Base
This deal was in the works for a while as we reported in July that ILQ had acquired a stake in Velocity Futures. Under the current plan, Velocity will become an introducing broker (IB) to ILQ, and notified clients that their accounts are being transferred. As Velocity continues to be operated as an independent entity, the deal isn’t a corporate acquisition, but the purchasing of the firm’s customer book by ILQ. Similar to other customer transfers, Forex Magnates believes that the main compensation of this deal will occur in the future as commissions on Velocity’s customer trading volumes. Any upfront cash transaction would have taken place earlier in the year when ILQ purchased its stake in Velocity.
OANDA Acquires Currensee
While industry valuations are rapidly climbing (see Plus500 IPO), the GFT and MIG Bank purchase prices reveal that not every deal is for a premium. Along those lines, social trading has been one of the hotter sectors in the forex industry, but it also has its leaders and laggards. Among the latter is Currensee, which was acquired last month by OANDA. It’s a peculiar deal, as some of Currensee’s broker clients are OANDA competitors. However, what it does do is provide an auto trading solution for OANDA. While committed to building solutions in-house, OANDA’s first effort into social trading, fxUnity, failed to survive a year in operation before it was discontinued. As such, the Currensee acquisition will allow OANDA to quickly begin offering auto trading services to its customers.
In regards to compensation, Forex Magnates believes that as a laggard in the auto trading sector, OANDA may have paid very little upfront for Currensee, with future payments tied to the product’s uptake and performance as a social trading solution for its customers. Also worth noting is that OANDA’s CEO, K. Duker has been public that the firm is seeking a ‘liquidity’ event via a sale or IPO. Therefore, it is reasonable to assume that OANDA may have offered equity instead of stock, with our estimates of up till 5% ownership.